toledoblade.com --

COLUMBUS - As a result of the Ohio Bureau of Workers' Compensation's troubled $50 million rare-coin venture and failed Bermuda hedge fund that lost $215 million, state government officials are investing in forensic accountants, lawyers, financial consultants, and appraisers.

The price tag is estimated at $6.5 million and growing because of the widening scope of investigations into the bureau's investments and some of Ohio's leading political figures, including Gov. Bob Taft.

Ohio's Controlling Board will decide today on state Auditor Betty Montgomery's requests to budget an additional $350,000 to accountant Crowe & Chizek and $115,000 to international auction house Sotheby's, which is conducting an inventory of the state's coin holdings.

"The landscape of this situation has changed dramatically since we originally went to the controlling board in June," said Jen Detwiler, a spokesman for the state auditor. "There are a lot of questions about what happened with the Capital Coin funds, and it's going to cost money."

The firms were initially budgeted a combined $180,000, a figure the auditor's office says will not cover the volume of work necessary to understand what happened at the bureau during the past seven years.

One of the other reasons for increased costs is that federal, state, county, and municipal agencies are involved in multiple investigations into the funds, such that Sotheby's must appraise coins for the auditor and arrange for their shipment back to Ohio to be documented as possible evidence of criminal wrongdoing, said David Redden, the auction house's vice-chairman.

There are already two convictions, three grand juries, 144 bureau investment managers under review, 420,561 pages of coin-fund records, and as much as $13 million missing from the coin funds managed by Tom Noe, the prominent Republican contributor at the center of the scandal.

Because most state agencies, including the governor's office, already have budgets designed to accommodate these types of investigations, the bureau will absorb the bulk of the additional costs generated by the probes.

The bureau has budgeted roughly $5.3 million during the next 12 months for liquidators, financial consultants, and law firms to examine and recover suspect investments, said bureau spokesman Jeremy Jackson.

"It's imperative that the BWC do all it can to bring in top notch resources and greater accountability and controls for the day-to-day functions of the investment shop," he said.

Payments to consultants and special counsel come from an administrative fund and do not affect the reimbursements given to injured workers, Mr. Jackson said.

So far, only Ennis Knupp and Associates, the Chicago-based financial consultant whose ongoing review has led to the termination of multiple investment managers, has received payment from the bureau. Budgeted for $3 million to $5 million, the firm has been paid $737,000 to date.

The bureau cannot act alone in hiring consultants. It must have approval from the Ohio attorney general before it can spend money on consultants or lawyers, said Tom Hayes, director of the Ohio Lottery and chairman of the bureau's three-person review team.

"This is the Blanche DuBois school of management, in that we're relying on the kindness of strangers," said Mr. Hayes, referring to a line given by the heroine of Tennessee Williams' play A Streetcar Named Desire.

Despite being hired more than two months ago, Development Specialists Inc. was not included in the bureau's budget projections. The Chicago firm is responsible for liquidating the coin funds.

It has already recovered most of the funds' noncoin assets, such as notes, mortgages, and equity investments, and has parked $13 million worth of the funds' assets in a bank account, said William Brandt, Development Specialist's chief executive.

The company and the bureau have met to discuss billing issues but have not reached a definitive conclusion on centralizing costs because of the different steps involved in the recovery process, Mr. Brandt said.

"I'm not sure how the billing will work for the Brinks trucks that brought the coins back a month ago," Mr. Brandt said, adding that he capped his firm's hourly rate at $175, which he called a substantial discount for the bureau.

Bailey Cavalieri, the law firm hired to serve as special counsel as the bureau attempts to recover the $215 million lost by Pittsburgh-based MDL Capital Management in an offshore hedge fund, also has not been added to the bureau's projections.

It is possible that a portion of the bureau's costs could be offset because of changes in the bureau's holdings. All money pulled from investment advisers are to be placed in market index funds, a broad composite of stock holdings.

Princeton University professor Burton Malkiel argued in his seminal book A Random Walk Down Wall Street that index funds consistently produce higher returns for lower management fees, meaning that the bureau could generate more income by replacing weak investment advisers with a comparatively passive index fund that matches the market's fluctuations.

"Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts," Mr. Malkiel wrote.

Contact Joshua Boak at: jboak@theblade.com or 419-724-6050.

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