USA Today Op.Ed. Underscores Need for National Security-Minded ‘Due Diligence’ in Purchasing Foreign Securities

(Washington, D.C.): On 7 February, USA Today published a wake-up call to
the American
people by Peter Schweizer (see attached), a research fellow at the
Hoover Institution: The U.S.
capital markets are being targeted for penetration by global “bad actors” seeking access to
millions — if not billions — of dollars that can, due to the largely undisciplined nature of such
foreign stock and bond offerings, translate into the underwriting of activities that affront
American moral values, respect for religious freedoms and/or national security interests.

CalPERS — A Case Study

As the Schweizer article indicates, thanks in part to the work of the William J. Casey
Institute,
there is fortunately growing pressure on the U.S. financial community to expand “due
diligence” assessments of foreign equity and debt offerings to include national security and
human rights considerations. The state of California — and in particular its public
employees
retirement system (CalPERS) — has emerged as a case study of what can go wrong in the absence
of security-minded evaluations performed by pension funds and their so-called “external fund
managers.”

Specifically, the costs associated with international portfolio managers ignoring these
concerns
are rising as a result of divestment campaigns, delays in bringing initial public offerings (IPO’s)
to market and new scrutiny by the Securities and Exchange Commission and the New York
Stock Exchange. In the case of CalPERS, at least, such present problems — and perhaps the
future prospect of security-related sanctions being taken against select foreign firms — is
evidently beginning to translate into investors declining to subscribe to such offerings.

According to an article published in yesterdays’ Wall Street Journal Asia by
Peter Wanacott and
Eduardo Lachica, entitled “Protest, Regulatory Review Hamper Planned Stock Listing of
PetroChina”:

After asking its investment advisers what they thought of investing in PetroChina, CalPERS
told
the California legislature’s audit committee that most “generally indicate that the company will
not be considered as part of their investment strategy.” One of Calpers’s managers, Nomura
Asset Management, said it wouldn’t invest in PetroChina because its parent company, China
National Petroleum Corp., or CNPC, is involved in a politically sensitive project in Sudan.

The Bottom Line

California State Treasurer Philip Angelides and his staff and the
California legislature (in
particular, that body’s Joint Legislative Audit Committee) are to be
commended for the
concern they have begun to express about taking national security and other appropriate
non-financial considerations into account in CalPERS investment decision-making.
Their actions
are creating a potential template for a more comprehensive and voluntary approach to
“due diligence” on the part of other publically-managed pension funds, as well as private
and institutional portfolio managers.