A Green Billionaire's Dirty Money

Students led divestment campaign against Tom Steyer's former hedge fund

Billionaire environmentalist Tom Steyer / AP
October 17, 2013

Tom Steyer is arguably the most high-profile environmentalist moneyman currently active in American politics. But he amassed a portion of his fortune by investing in ventures that critics have dubbed environmentally destructive and socially irresponsible.

Forbes estimates the former hedge fund manager is worth $1.5 billion. He has used that fortune to advance his anti-oil, anti-coal, and climate-concerned political agenda.

Steyer has poured that money into the American political system, bankrolling congressional and gubernatorial campaigns and hosting fundraisers for President Barack Obama.

Less publicized than Steyer’s use of his fortune are the means by which be attained it: through Farallon Capital Management, the nineteenth largest hedge fund in the world, which he founded and headed until October 2012.

Despite his strong environmentalist positions, some greens are wary of Farallon’s interests in fossil fuel companies during Steyer’s tenure.

The hedge fund "minted a lot of money off oil and gas investments, among other environmentally destructive business ventures," Darwin Bond-Graham, a writer at the left wing website CounterPunch, noted in April.

Those ventures have received little scrutiny since Steyer thrust himself into the public spotlight by becoming what radical environmentalist Bill McKibben has called "Daddy Greenbucks."

However, the business practices were a topic of considerable controversy a decade ago when student groups at a number of American universities, most notably Yale, led a campaign that protested university endowment investments in Farallon funds.

"We do not want our universities to profit from investments that harm other communities," wrote a number of the students involved with the group, which they dubbed "UnFarallon," in a letter to Steyer.

"We are concerned about the impact some of Farallon’s recent investments have had," the students added. Steyer did not respond to the letter.

UnFarallon members who spoke with the Washington Free Beacon said that the campaign was more about transparency than divestment. However, they criticized many of Farallon’s business practices, which they said supported environmentally destructive practices and profited from corrupt business practices in the developing world.

Farallon did not respond to requests for comment on this story.

Andrea Johnson, one UnFarallon member interviewed by phone, cited Farallon’s involvement in a venture to sell water from an aquifer below the 100,000-acre Baca Ranch in Colorado.

Farallon’s Vaca Partners, a joint venture between Yale and the hedge fund, bought the ranch for about $16 million in the mid-1990s. It planned to sell the water to nearby urban areas, including Denver.

That would produce a hefty return for Farallon and Yale. One fund executive said Farallon expected a return between 45 and 61 percent.

Local residents and environmental groups said the project would ruin the San Luis Valley, which depended on water from the aquifer.

Floyd Getz, a resident of Monte Vista, Colo., and a former member of the state’s Water Conservation Board, accused Vaca Partners of trying "to steal San Luis Valley water."

"All the people of the valley now find themselves again faced with an attack on their water rights and an attempt to financially destroy the agricultural economy," Getz wrote in letter to the Denver Post.

Gary Boyce, Vaca’s managing partner, was pushing a pair of state ballot initiatives at the time that would expedite Vaca’s ability to extract and sell water from the Baca Ranch.

"In a nutshell, the ballot initiatives were basically designed to bankrupt the valley," said Christine Canaly, a former NBC News engineer who moved to the San Luis Valley and helped fight the initiatives.

The initiatives were defeated after a coordinated political effort by residents of the valley. Farallon later sold the ranch to the Nature Conservancy for $32 million, nearly doubling its investment.

"You put it in perspective, how many dollars the district and the Valley and the state have spent in attempting to deal with this, and it isn't quite rape, but it's close," said Rio Grande Water Conservation District president Ray Wright after the ballot measures failed.

Steyer was surprised at the uproar over the Baca Ranch deal. "We spent a ton of time looking at the environmental issues and trying to convince people we were right," he said in a 2005 interview with Institutional Investor.

"Eventually, we got it through our thick skulls that we were not going to convince anyone," Steyer said. "Were we dumb? Yes, very! But we weren't irresponsible or wicked."

Johnson does not doubt Steyer’s environmentalist views but she said that he, like many "socially responsible" billionaires, managed to wall off his personal political views from his business practices.

"I think it’s ironic but not surprising that Steyer can act in one way in his public and political life and do something that I would argue runs in contradiction to that behavior in his business life," she said.

Environmentalists have pointed to Farallon’s investments in large oil and gas companies as a noteworthy discrepancy between his political and business personas.

"Steyer and Farallon ironically helped save and rebuild a few major oil and gas drillers, or helped sell-off oil and pipeline assets to bigger players in the energy industry," Bond-Graham noted.

Some critics have suggested that Steyer could profit financially from his intense opposition to TransCanada’s Keystone XL pipeline, his cause célèbre.

After observers pointed out that he had funds invested in competitors to TransCanada, and therefore could profit were the pipeline to be scuttled, Steyer directed Farallon to sell his stake in the company.

One industry insider called Steyer "an opportunist" when asked about Farallon’s investments in industries and companies not typically associated with the environmentalist left.

"Many will find that he fits in nicely with the Al Gore model of activism: lots of money and plenty of media attention, but also a fatally flawed public persona that the public will never fully embrace because they simply don’t trust him," said the insider, who asked to remain anonymous.

Johnson pointed to "an incredibly pervasive and pernicious tendency in the financial sector to practice the art of cognitive dissonance and to wall off what you’re doing with the funds you manage from what you do in the rest of your life."

UnFarallon focused on other "dirty" Farallon investments such as the company’s role in financing a coal-fired power plant in Indonesia.

Farallon held a controlling stake in a $180 million bond issue used to finance the Paiton I power plant in 2003. Paiton was the first privately owned power plant in Indonesia.

The Paiton deal was subject to local and international scrutiny. The Wall Street Journal published three investigative stories about the project, detailing the extent of cronyism involved in its financing and operation.

Like a number of the companies involved in the deal, Farallon had extensive political connections in Indonesia.

Farallon "knows Indonesia well, with more than $1 billion invested there since 1997," the Asia Pacific Bulletin reported in 2002.

The Bulletin noted those connections in covering Farallon’s 2002 deal to purchase 51 percent of the Indonesian Bank of Central Asia. "The secretive San Francisco-based fund does not have a track record in running financial institutions," the Bulletin reported.

Other observers were also surprised at the deal, which saw Farallon beat out competitors with more banking experience and offered better deals.

"Suspicious types will wonder how this happened," wrote Angela Mackay in the UK Telegraph. "How could Standard Chartered [Bank], with a 100-year history in the country, have lost to such an outsider?"

"But Jakarta is all about who you know, and clearly Farallon has a great contacts book stemming from a couple of distressed debt deals it has done there over the past couple of years," Mackay said.

Farallon purchased its stake in the bank for $520 million through FarIndo Holdings, a Farallon vehicle (FarIndo being short for Farallon-Indonesia) incorporated in the tax haven of Mauritius. That sum amounted to 25 rupiah less per share than Standard Chartered had offered.

The bank already owned government bonds expected to bring in $650 million per year. Farallon was buying a bank from the government for less than the interest payments it would receive annually from the same government.

That arrangement drew stiff opposition from Indonesian politicians, such as National Development Minister Kwik Kian Gie, who insisted the Farallon deal would cause the Indonesian government to lose millions.

Johnson said Farallon’s work in Indonesia underscored other UnFarallon concerns about its investment strategy. The fund was tied to numerous efforts to liberalize third world economies in the 1990s, a strategy that many on the left decried as exploitative, even imperialistic.

"Fundamentally, we were questioning the model of the financial system more broadly. I don’t think anybody that was involved in [UnFarallon] would have told you that they liked this model of enormous black-box financial flows being used in the service of this neoliberal reform model," Johnson said.

She also mentioned Farallon’s work in Russia, which came under intense scrutiny in the late 1990s and early 2000s due to its involvement in illicit attempts to capitalize on the economic liberalization of the former Soviet Union country.

The U.S. Agency of International Development (USAID) formed an agreement with Harvard University’s Institute of International Development (HIID) in the mid-1990s to guide the former Soviet Union country towards a market economy.

Harvard economist Andrei Shleifer and Jonathan Hay, a top HIID advisor, were the two officials charged with spearheading the project.

Shleifer and Hay advised the Russian government on the privatization of more than 200,000 corporations, the issuance of government debt, and the construction of financial institutions to integrate the nation into the global economy.

The two HIID officials were privy to vast inside knowledge of the restructuring of the Russian economy. The U.S. government would later charge them both with using that knowledge to enrich themselves, in violation of USAID conflict-of-interest agreements.

Harvard would eventually shutter the HIID following the scandal.

Farallon provided the investment vehicle for a number of those schemes and was also the target of legal action by the U.S. government for its role.

Shleifer’s wife, Nancy Zimmerman, left Goldman Sachs in the early 1990s to start Farallon Fixed Income Associates, a joint venture with Steyer’s Farallon Capital Management.

Zimmerman invested funds on Hay’s and Shleifer’s behalf, according to charges brought by the federal government, while the two Harvard advisers were using their positions of influence with the Russian government to gain advantages over other companies and investors.

Elizabeth Hebert, a hedge fund manager who Hay would later marry, wrote a memo on May 16, 1996, that was addressed to Steyer, who claimed he never received it.

The memo, referred to in the federal government’s complaint as the Steyer Memo, laid out the advantages of a package of investments through Hebert’s Pallada Asset Management Company.

Pallada, a mutual fund management company, was to be overseen by the First Russian Special Depository (FRSD), an intermediary required for mutual funds under Russian law, which would execute and record all transactions.

Both entities required approval from the Russian Securities Commission, which Shleifer and Hay helped establish and for which they acted as advisers.

Pallada’s presence in Russia would "be established with the active involvement of the Russian legal team that the Federal Commission entrusted with the drafting of the original mutual fund regulation," the Steyer memo explained.

"We are likely to get a license before anyone else which will give a significant first mover advantage," it said. "In the short to medium term our advantage comes from the fact that the regulator wants us to be first."

The memo, designed to solicit investment for Pallada, was faxed to Zimmerman’s office in Cambridge, Mass.

Pallada’s business plan said that HIID’s close relationship with Russian regulators would be used "to facilitate the issuance of licenses and clear other regulatory hurdles which are expected to be a hindrance to competitors."

Pallada would go on to be the first mutual fund to register with the Russian Securities Commission, and the sixth to receive its operating license.

In the end, Zimmerman would back Pallada with $500,000 in Farallon Fixed Income Associates funds.

Shleifer transferred $200,000 from a joint bank account with Zimmerman to Pallada to finance ventures that were receiving preferential treatment due to his relationship with Russian regulators overseeing the nation’s nascent financial sector.

Steyer denied any knowledge of these dealings, but admitted in a deposition that he routinely oversaw Zimmerman’s activities at Farallon Fixed Income Associates.

"My main role in oversight was to talk to Nancy [Zimmerman] on a regular basis to ask her what they were doing and how it was going," he said.

USAID announced in 2004 that it had reached a $1.5 million settlement with Farallon Fixed Income Associates to resolve claims that the company used federal government resources to advance its financial interests.

That settlement was based on additional Farallon investments involving short-term Russian government bonds known as GKOs.

"Between December 1995 and June 1997, [Farallon Fixed Income Associates], under the direction of Zimmerman, improperly co-opted the resources of the USAID-funded Harvard project in Russia […] to create, manage and operate a Russian company known as New World Capital," a Justice Department press release said at the time.

The company was created to invest in GKOs and repatriate the funds to the United States under the guise of loan repayments to an Illinois bank run by Zimmerman’s father. The scheme allowed investors, including Farallon, to circumvent high Russian taxes on repatriated income.

HIID was central to the scheme, due to Shleifer’s intimate knowledge of the Russian bond market.

"As an advisor to the Russian Deputy Prime Minister for Economic Affairs on stabilization policy (including government debt policy) and as a participant in negotiations concerning financing the Russian government debt, Shleifer had valuable confidential information concerning the Russian bond market," the government said in its complaint against HIID.

"Accordingly, he was in a position where he would have been likely to have had advance notice if the government were suddenly going to stop backing its debt," the complaint added.

Despite its settlement, Farallon Fixed Income Associates denied any wrongdoing, saying it "at all times […] acted properly and lawfully."

"To avoid the costs of expensive litigation against the government that could go on for years, the company agreed to pay this, which amounts, after three or four years of negotiations, to a small-potato, nuisance-value settlement," Farallon Fixed Income Associates’ attorney claimed.

Johnson and UnFarallon also criticized Farallon’s activities in Argentina, where the fund was involved with a price-gouging telecommunications company, and Australia, where it invested in a lead-smelting company with a poor environmental record.

The disconnect between the causes to which Steyer devotes his fortune and the means by which he obtained it is inescapable, Johnson said.

It is "part and parcel of a certain model and way of thinking in the financial sector."

"I’m sure that Steyer would have a good explanation of the value of all of these investments," she said. "The critique was partly just the model, not just that Farallon is a particularly awful hedge fund."

"That’s just the way the financial sector works: you tend to make a lot more money off of things that are bad for the environment."