AUGUSTA (AP) – Maine Senate Republican leaders Tuesday called for an investigation into the state treasurer’s $20 million investment of cash pool funds in Mainsail II commercial paper whose rating slipped from highest to subprime within two weeks this summer.

Mainsail II assets were frozen, putting the state’s investment in question.

Republican leaders called for a legislative investigation. They also want state Treasurer David Lemoine, who was elected by the Democratic legislative majority, to answer questions before members of legislative leadership.

“The money was frozen in August, yet it was not until November that the loss of this money was disclosed, why?” said a statement by Senate GOP leader Carol Weston of Montville and the assistant floor leader, Sen. Richard Rosen of Bucksport. “What other questionable investments has the treasurer made?”

Lemoine said nearly $20 million, representing about 3 percent of the cash pool, were invested in Mainsail II on Aug. 8. A financial adviser from Merrill Lynch advised the treasury that the investment met the state’s criteria, said Lemoine.

He noted that Mainsail’s commercial paper had top ratings of Moody’s Investors Service and Standard & Poor’s.

On Aug. 20, the Bank of New York, Mainsail’s trustee, froze Mainsail’s assets. As a result, the state’s Mainsail assets were frozen. The next day, Mainsail’s rating was downgraded to junk status, Lemoine said.

Lemoine said the state is in a position to receive all of its investment back, with interest, but did not say when. He defended his agency’s investments, saying cash pool earnings for fiscal 2006-7 totaled nearly $64 million. The current balance in the cash pool is $760 million.

“We are putting the cash pool to work for Maine taxpayers and have been very successful in recent years,” said Lemoine. “Mainsail is currently a nonperforming asset that will likely have little impact on state finances.”

The GOP leaders are not convinced.

In a letter to the House and Senate presiding officers, Weston and Rosen said Lemoine is placing too much of the blame on Merrill Lynch. They want to see a list of the cash pool investments by the Treasury, and “any other investments which the Treasurer has purchased that could be deemed risky.”

Mainsail II is a debt vehicle run by Solent Capital Partners LLP, a hedge fund based in the United Kingdom.

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