Has CalPERS’ General Counsel Lied to Its Board About Our Suit?

As readers may recall, we filed suit against CalPERS on February 27, 2014 to obtain access to private equity fund data that CalPERS previously gave to two academics at Oxford University. We have proof of service as of March 4, 2014 (please find both filings embedded later in this post). At around that time, CalPERS moved the matter over internally from being handled by its Office of Stakeholder Relations, which includes Public Records Act specialists, to a litigator.

You’d think that’s pretty conclusive evidence that CalPERS knows we’ve sued them.

CalPERS’ Interim General Counsel, Gina Ratto, is telling CalPERS board members the exact opposite, that there was no new litigation filed in the past month. That statement is made at the location in the agenda materials where the CalPERS General Counsel reports to the board on new lawsuits to which CalPERS is a party (you can also view this document on the CalPERS website).

Proof of Service of Writ Petition for Aurora Advisors v. CalPERS

Now astute readers might argue that CalPERS could have a threshold of materiality before the legal department is required to report a particular legal action to the CalPERS board. We have reason to doubt that. Individuals who have knowledge of CalPERS’ internal practices have taken interest in our work. One well placed source has told us that this report customarily includes even trivial legal disputes and added, “Historically, there was no materiality test applied as to whether a suit merited being reported.”

While it is possible that CalPERS has changed its procedures of late, CalPERS’ previous irregularities in its handling of our Public Records Act request suggest that these procedural failures are the result of an effort to keep disclosure of our inquiry to the bare minimum. CalPERS staff failed, contrary to long-standing internal policies, to tell its board about our records request on a timely basis.

As we wrote in an earlier post, my PRA was handled in a completely irregular manner, with the apparent intent of deceiving the public. CalPERS publishes a monthly log of PRA requests, and its practice is to include PRAs when filed. Mine was lodged in September, yet was not included in any of its monthly logs, which are also the board’s tool for monitoring PRAs, until CalPERS took the brazen and inaccurate position that the matter was settled in late January, a full five months later. That meant the staff had ignored procedures put in place to keep the board informed.

If our beliefs are correct, the only conclusion that one can reach is that CalPERS’ staff thinks their interests are so closely tied to those of the private equity industry that even its general counsel’s office is willing to abuse multiple well-established reporting procedures to keep its board in the dark (please see the form of our letter to board members on this matter at the very end of this post). If so, this is deeply troubling from a corporate governance standpoint. It indicates an independent review is necessary to see if the board is being misled on other private-equity-related matters.

Writ of Mandate Webber v. CalPERS [Endorsed Filed]

PRA Procedures Abuse Letter

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  1. Jackrabbit

    First they ignore you, then they ridicule you, then they fight you, then you win.
    – Gandhi

  2. hunkerdown

    An “aware” of attorney’s fees? (petition for writ of mandate, p 10) I’m sure you already are….

    1. Yves Smith Post author

      Not to worry, CalPERS has made far more consequential mistakes in dealing with us than mere typos. They’ve made damaging admissions in writing.

  3. vlade

    I wonder whether this won’t turn out to be a bigger story than whatever you were pursuing originally – or whether this means that the original story is even bigger than you thought.

  4. Hugh

    It looks like CalPERS is running a stall admitting nothing to nobody, including their own board until absolutely forced. The reason for this is I think fairly clear. Public pension funds need wildly unsustainable, unrealistic returns on their investments to cover their commitments. I don’t know what the returns for CalPERS are precisely, but last I heard returns were supposed to be in the 8%/year range. This reflects a mixture of overpromising and underfunding. At the same time, these pension funds are mandated to seek safe, low risk investments which, of course, pay nothing close to 8%. While CalPERS can’t make the high risk investments it needs to achieve the returns it needs, it can invest/partner up with groups like hedge funds and private equity firms to do this for them. These partnerships raise a host of issues that I am sure CalPERS would like to keep in the dark. What the PE firms are doing could range from dubious, to seamy, to borderline illegal, to illegal. They could be engaging in anti-labor and other activities at odds with the values of CalPERS members. CalPERS executives could also be benefitting financially from these arrangements, a sort of IBG YBG –they get the bonuses now, the sh*t hits the fan later. But the basic question is one of risk. How much money is CalPERS gambling with and where? Again the answer appears to be, a lot. So if CalPERS is heavily involved in dicey finances, the last thing it wants is public disclosure of this, and worse, if Yves wins, the principle established that these deals are open to scrutiny by the public on an ongoing basis.

    I would not be surprised if the CalPERS board didn’t already know a lot about the risks of PE and hedge funds investments at least in general terms, and so part of the stall. The CalPERS general counsel does not tell them “officially” about pending litigation that would expose CalPERS’ PE connections and they pretend ignorance about it. Yves sends them a letter informing them about it. They send a request to counsel seeking clarification. Counsel gives some “Yes, there is a suit pending but …” non-answer, and they can go back to their golf and drawing their salary as board members. What I would be surprised and even amazed at is if the board actually ordered the CalPERS staff to produce the information requested. More likely, there will be successive rounds of partial disclosures none of which actually conform to the request, the point being to drag this out as long as possible, that is unless CalPERS’ tactics and attempts to hide its dubious activities create a public outcry. Then and only then would CalPERS provide the information along with lots of whining defenses about how if anything goes bad in these investments it won’t be their fault but the fault of those seeking to make them public. Just my take.

    1. ambrit

      Wasn’t CalPERS burned badly in the Enron fiasco? If so, they evidently haven’t learned the requisite lessons. Which goes to highlight the part of your comment that jumped out at me; “This reflects a mixture of overpromising and underfunding.” That being so, shouldn’t the entire Board get the boot? They are obviously not up to their responsibilities.
      As I’ve said many times before; NC is a Public Utility. It keeps the Truth flowing, just like the water.

    2. Jess

      Absolutely correct on all counts. Once again, Hugh shoots and scores, just as I believe Yves will in the end. And as Vlade suggests, I’m betting that when Yves gets to the bottom of things, they will be even more vile than we might currently suspect.

    3. susan the other

      Until this little revelation by Yves I had been thinking that the pension funds had been deceived and tricked into PE/Securitized/bad investments by the banksters/vultures. Now I think the picture must become more sophisticated. The retirement fund has a responsibility not to invest in bad stuff and concurrently they must do their due diligence. So betcha their fiduciary mandate has been ignored. Leaving CalPERs without much recourse for some huge losses. Who are they going to sue, the threadbare general counsel? And more disconcerting is the 8% Hugh mentions as the pension fund’s benchmark for breaking even. That’s a lot of return in todays economy. And returns this big on funds this big can warp the entire economy in no time. Which came first, the need for returns on pension funds or the unregulated promotion of shady investments for the banksters’ gain? Why didn’t some regulator step in and tell them they were both crazy? Oh, I forgot.

  5. Chromex

    At one time int the US 6-8% was not “wildly unrealistic” but reflected a rate of risk lower than the market average and also less risky thant the stick market index- (see any econ text or Forbes investment course pre 1999 ) and that was the time when these rates were statutorily set, former Mayor Bloomberg’s demagoguery notwithstanding.
    In fact, investment in an S an P 500 fund over the last few years, would have easily exceeded this requirement. While generally, back in the day, s and p mirror finds were thought to earn ( on average) 11% historically, the “lower” return rates were set to encourage investments less risky than the general market. After the mini crash @ early 2k and the big crash @ 2008-9, funds were faced with devastating year-over-year ( and year after year ) losses. Most pension funds earned essentially nothing for over a decade.
    Very often, a Board or other other body that governs such funds is a political appointment and knowledge of investment finance is not a prerequisite. After the 2008/9 losses , state treasurers felt forced to seek high returns to make up for the losses. Public pension funds and Boards and legisilators who made the decisions for them, often heard presentation after presentation about so-called high returns available with private equity. All seemed quite ignorant of the downsides (liquidity of capital springs to mind) . See the Detroit bankruptcy battle where even the judge has suggested that the ridiculous deals credulous Boards entered into with various and sundry squids, could or should be set aside.
    I do not think the general market today is safe, but I have no idea when it will fall. But the reason 6-8% ( I am using this range to reflect other state assumptions) seems “unrealistic” NOW is solely due to QE to infinity, which has never historically been the case in the US until now. Back when most legislatures set those rates , they were easily obtainable with conservative and relatively safe portfolios. Among other reasons, this may be why CALPERS is dragging its feet.

    1. Jess

      With all due respect, from what I know of CalPers and the situation here in CA, those 8% ROI projections are not the result of any law or regulation but are simply the Board’s choice, and they are free to change it at any time. Which, of course, they’re not going to do because shortfalls in ROI have been the norm here for decades. Over the past decade — before and after the GFC — I’ve seen estimates of California’s pension underfunding at anywhere from $190 billion to $500 billion to $2 trillion.Changing the ROI to the 3% or so that they’ve actually achieved would reveal the full extent of the over-promising and under-funding Hugh referred to.

      Also, some members of the CalPers board are not political appointees but either serve ex-officio by virtue of holding some other state position or are representatives of major union constituencies.

      Just BTW, in my small city our annual CalPers assessment has gone up by somewhere around $4 million in the past few years. Of course, our little city of 66,000 has to pay two retired Fire Chiefs pensions totaling nearly $400K a year. ($165K for one, $220K for the other.)

  6. HotFlash

    Yves, this is better than a toasted Danish with my coffee. A question, though, from a noob. I wasn’t paying attention when Greenspan and the bunch decided to set the interest rates so low. Did no one speak up about this sort of obvious consequence, or the harm to individual retirees, pensioners, universities, arts organizations and others who depend on interest income? It still seems like this trainwreck is treated as a Who Could Have Known situation. I guess my question is, were the Chicago Boys ever acting in any kind of good faith, or has this always been about wealth transfer?

    1. psychohistorian

      I would posit that good faith was never involved. While part of the reason is wealth transfer, another is undermining the social safety net…..socialism for the masses instead of for the rich. Social Security Insurance is another example of replacing insurance actuaries with politicians…..Who Could Have Known???????

      You ask why no one spoke up about the obvious consequences. It is the same reason that none speak about the ongoing implications of unfettered inheritance…..enjoy your coffee and Danish.

      1. HotFlash

        Thanks for this, psycho. I just got back from seeing Bill Black’s TedX talk, had not known that the Fed is empowered to regulate all financial institutions incl those who are not covered by FDIC, but Greenspan and Bernanke didn’t lift a finger as the housing bubble inflated and fraudulent mortgages were issued in record numbers inorder to provide fodder for mortgage-backed dreck (kind of like the ingredients for Sweeney Todd’s pies). Seems like a pattern.

    2. financial matters

      At the least it wasn’t penalty interest rates based on good capital..

      “”1.2 Summary of the Crisis Response and Consequences: A Review of Findings Presented Last Year

      a. Liquidity or Solvency Crisis?

      It has been recognized for well over a century that the central bank must intervene as “lender of last resort” in a crisis. Walter Bagehot explained this as a policy of stopping a run on banks by lending without limit, against good collateral, at a penalty interest rate. This would allow the banks to cover withdrawals so the run would stop.”


    3. Jeff N

      wealth transfer. they know exactly what they are doing, and that doing evil pays better than doing good..

  7. steelhead23

    Yves, I am wildly impressed by your doggedness on this issue. I feel quite certain that you know the routine – delay and obfuscate until your weak adversary goes broke or gives up – or at least until the guilty parties are somehow distant from the organization. I expect that you will continue to get the run around until the court orders them to release the information.

    Question: I recall that the underlying purpose of your request was to perform a bit more financial forensics on CalPers relationships with PE firms, following on the work of two researchers who obtained much of the information you are seeking. What exactly do you expect to find? Conflicts of interest perhaps? More Buenrostro/Villalobos-type hijinks? Or, simply gouging?

  8. washunate

    What continues to amaze me about the rot in public institutions is that key actors continually believe they can be the exception to the rule that the cover-up is always worse.

    Good luck Yves. It is both entertaining and frightening watching what we know in general about mismanagement unfold in a particular case. I doubt anyone involved in the senior management is accustomed to dealing with a member of the public that is both competent and tenacious, all the while maintaining the necessary good faith in the process to make this really stick in the end.

    I almost feel sorry for them.

  9. Tony Butka

    Yves – I just completed a letter to the Board as a CalPERS member requesting the same information you are seeking, this time as a stakeholder/member of the Plan as well as a PRA request.
    I’m also referencing the last disaster when CalPERS refused to provide PE information and the whole mess blew up in their faces. Where there is very high secrecy, it is generally because certain folks have a good reason to wrap themselves in confidentiality and hide.
    I would be delighted to send a copy to you & your California counsel.

    Keep up the good work!

  10. habenicht

    …just when I thought there was no way I could like this site any more than I already do – this happens!

    This country could use a whole lot more accountability. Keep up the FANTASTIC work!

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