CalPERS: Judge Rules Our Suit is Premature

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We will not have a copy of the formal ruling on our case against CalPERS until the court issues one, but based on a verbal report, my understanding is that Judge Marla Miller ruled from the bench that our case was premature.

If her written order confirms that understanding, this is the least adverse outcome we could have experienced. It does not preclude us filing again at a later date. We will review the written order to see whether it would make sense to file a motion for reconsideration or an appeal.

The ruling is nevertheless puzzling, and may have been the result of our having been concerned with getting evidence into the record so as to have a good factual foundation in case CalPERS appealed, which we thought was likely had we prevailed. But that may have had obscured the most salient facts.

By way of background, we had asked CalPERS to give us data about their private equity fund performance that they provided to two scholars at Oxford University, Tim Jenkinson and Ruediger Stucke. Their paper, written with an additional co-author, Miguel Sousa, was published in 2013. It stressed that they had the entire performance of all of CalPERS’ 761 private equity investments, from CalPERS’ first participation in that strategy in 1990 through the first quarter of 2012. The article also stated repeatedly that substantial portions of their data had never been previously made public.

The notion that our suit was premature was based on CalPERS’ claim that they were cooperating with us, hence the suit was not ripe. But the standard under the Public Records Act (California’s version of FOIA) is whether it took litigation to compel the production of records.

CalPERS had in fact deemed our records request closed as of January 27, 2014, as a letter from CalPERS that we included as an exhibit in our original filing clearly showed. That is also confirmed on CalPERS’ website (see the final entry on the page):

Screen shot 2014-05-03 at 1.31.24 AM

My attorney Timothy Y. Fong sent a letter on February 1, 2014 objecting strenuously to CalPERS’ decision. A CalPERS in-house attorney responded, saying that they had no record of having given the academics the data which is effectively accusing them of either not getting it through legitimate channels, raising questions about their conduct and the accuracy of the work. But CalPERS nevertheless told us on February 4 to tell them what we wanted. We sent a letter based on our reading of the description of the data in the paper, and also asked for more of one type of data (effectively asking that it be brought up to date).

On February 12, 2014, they sent a letter which excepted the language relating only to the request for an update and sent that data only. So CalPERS had effectively refused to produce any data related to the academics’ paper. Moreover, they assigned the response a new Public Records Act (PRA) number, effectively saying they regarded the part they responded to as a separate PRA. And they declared that one to be closed too.

We filed suit on February 28, 2014. Only after we filed suit did CalPERS contact the academics, who told them who at CalPERS had provided the records and even e-mailed a copy back.

So until we filed suit, CalPERS’ position was that the original PRA was closed, they never heard of the academics, and they had nothing but unrelated material to give us. The filings from CalPERS don’t dispute that; in fact, they provided evidence that supports that view.

We have continued to have back and forth with CalPERS because the information they did send (the PDF that the academics’ received plus less than complete versions of that data in spreadsheet format) was not responsive under the PRA. Even though the academics only got a PDF, the PRA stipulates that machine-readable documents must be provided in the manner they were kept. A PDF was clearly generated from an Excel spreadsheet or other data source. They have yet to produce the same information information in the stipulated format. They have provided other information, but they have yet to fill that request. And even one of the affidavits they submitted effectively admits they have no idea whether things stand:

Screen shot 2014-05-03 at 1.58.14 AM

Note that our count was based on having omitted the duplicates due to inconsistent entry of the same funds that CalPERS admits is a problem rife with its data. We submitted an second expert affidavit addressing that issue at some length. It appears the judge accepted CalPERS’ framing as opposed to ours, and that would render closer inspection of the details moot.

The judge apparently also took issue with our position that the items we had asked for on February 8, 2014 should be incorporated into the original PRA. Our view was that precedents allow for PRAs to have related information requests incorporated into them (largely due to the idea that filing separate cases for PRAs that were closely related to an original PRA was unduly burdensome). The judge apparently thought that that notion was too expansive and could be used to allow PRAs to be pushed well beyond their initial scope.

As indicated, we’ll need to look at the actual ruling to determine what if any additional legal steps to take and when. Stay tuned.

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  1. kimsarah

    Premature? CalPERS claim that it is cooperating is like fossil fuel polluters cooperating with climate change activists by saying they’ll admit CO2 might be a problem 20 years from now, when it might be “ripe.” Or like telling prosecutors that it is premature to go after individuals on Wall Street with criminal cases. The time is not yet ripe for that.

    1. Tom in Colorado

      kimsarah regarding “Premature”,
      Good point. Government and corporations have the best weapon of all: time on their side, meaning generations of defense attorneys can respond to this case. It enhances job security for the bureaucrats. In the meantime, Yves and the rest of us are getting more and more “mature,” meaning we may all be dead before resolution of this case. Unfortunately, so too will the academics who first produced the study using CalPERS-suppled data. It’s time for them to step forward with what they’re hiding. The academic community will also suffer the longer this case goes on. That’s the same academic community who cheered the “transparency” that the Democrats, including Jerry Brown and Obama, would bring to government.

  2. Paul P

    CalPERS must have the performance information you requested on a spread sheet which could be emailed in about 30 seconds. The information must be embarrassing.
    Have you thought about asking the unions whose members contribute to CalPERS to join the suit? Or a celebrities from Hollywood?
    The salient facts were obscured. Too complicated a case for the judge? Time to step down.

  3. LucyLulu

    I heard somebody speak not long ago. He mentioned today’s young people are learning how to get things done in this culture of a non-responsive government and economy that only listens to the rich and powerful. They’re using non-traditional methods that bypass conventional institutions. I don’t know how true this is, particularly here in America. One can hope though.

    Good luck, Yves. I doubt the facts were obscured or the case was too complicated. It’s more likely a consequence of the politicization of our justice system.

  4. Jim Haygood

    ‘It appears the judge accepted CalPERS’ framing as opposed to ours, and that would render closer inspection of the details moot.’

    Suing a state agency in state-run courts tends to be an uphill battle. At least it’s civil litigation, where there’s a semblance of a fair contest, versus criminal litigation where the state always wins in our Sovietized conviction mills.

    PE: Pathological Egregiousness. Justice has been delayed. But eventually, these white-shoe card sharps are gonna get it!

    1. Banger

      Indeed, the courts generally give the State a lot of room–and this has always been the case. The facts have to pretty much be like smoking guns (and even then you can’t be sure) before most courts will act unless the non-state litigators are politically more powerful than the State. It’s fairly rare, these days, for judges to stick their necks out against powerful forces–it’s only human.

  5. craazyman

    This must be frustrating. It’s possible they’re stoners out there, and that makes it hard to keep track of details in the mind. It’s like a process of instant continual forgetting. You hold a detail in your mind and three seconds later you remember you were thinking about something but aren’t sure what it was. Then you look at the wall and think of something else entirely. When a New Yawkers’ alert ambitious and slightly neurotic precision collides with the stoner mind, it’s like throwing a 90 mph fastball into a giant bean bag chair. Just because somebody is a judge doesn’t mean they’re not a stoner, if they live in California. Can you imagine trying to put together an Excel spread sheet stoned? Whoa. It would take a few hours just to get the program open on the screen. And by that point you’d have forgotten what you were doing anyway.

  6. TarheelDem

    If I were a Californian, I would take a few minutes to write my legislators asking why CalPERS is wasting taxpayer (or pensioner money, however it is being financed) defending itself against this rather straight-forward request. The expectation of legislative pressure as a result is not great but the effort is not great either. And it provides a non-scientific test of the degree to which legislators are A-OK with what CalPERS is doing. Spending money going to court does not seem to be in the interests of retirees.

    1. Cal

      I would also ask why individuals that have lost billions of CALPERS money are allowed to further profit from other enterprises and programs mandated by the state and subsidized by taxpayers?

      i.e. Victor MacFarland and his Corte Madera 180 Unit monstrosity that was allowed by the cowed local officials to incorporate 18 low income units which are mandated by state law. You’d think that having lost billions of California public employees’ pension dollars, this guy would be precluded from doing business in the state in a manner that harvests tax credits and overwhelms local jurisdictions following state fiat?

      “Former Highflier for Calpers Raises Money for New Deals”

      ‘He leveraged that strategy to become one of the lead real-estate advisers to the California Public Employees’ Retirement System, the giant pension fund.”

      “But when he strayed from his expertise, disaster struck. One of Mr. MacFarlane’s ventures became associated with a failed southern California land deal that ultimately cost Calpers nearly $1 billion and led to Mr. MacFarlane’s 2009 resignation as a real-estate adviser to the pension fund.”

      “Now Mr. MacFarlane, 60 years old, is back trying to raise money for new deals and is actively investing…Mr. MacFarlane acknowledges this is a tough fund-raising climate and he is being hurt by his connection with the widely publicized loss at Calpers. But he isn’t making excuses.”

      “When it comes to commercial real-estate business, I have nothing to apologize about,” he said. “Our performance over the past 25 years is second to none.”

      MacFarlane Partners has a few things working in its favor. Goldman Sachs Group gs -0.93% Inc. owns a 20% stake in the firm, having converted warrants to equity about a year ago. ”

    2. Yves Smith Post author

      That is the one thing CalPERS is afraid of, the legislature. It would be terrific if California readers would do that. Given the rates Steptoe charges, I’d estimate they’ve spent a minimum of $25,000 and more likely $40,000, fighting us.

      Please ALSO point out that:

      1. The paper that led to this data request found that the private equity funds were scamming CalPERS by exaggerating the value of the companies that they owned around the time of fundraising. We wanted, among other things, to see if we could reproduce their findings.

      2. The SEC, which just obtained the authority to regulate PE firms in 2010, has found rampant fee abuses. The presumption had been that the PE industry deserved deference. That isn’t the case. PE funds are stealing from investors like CalPERS, yet when members of the public try to use the PRA process to obtain information, funds like CalPERS effectively side with their abusers and fight providing information.

      Here are the indications that the SEC is not happy with what is has found: This story is pretty clearly an official plant. Key section of Mary Jo White’s testimony:

      These “presence” examinations are more streamlined than typical examinations, and are designed both to engage with the new registrants to inform them of their obligations as registered entities and to permit the Commission to examine a higher percentage of new registrants. Some of the common deficiencies from the examinations of these advisers that the staff has identified included: misallocating fees and expenses; charging improper fees to portfolio companies or the funds they manage; disclosing fee monitoring inadequately; and using bogus service providers to charge false fees in order to kick back part of the fee to the adviser.

      My understanding is that the SEC does not get that specific in Congressional testimony about bad practices unless it about to send Wells notices (ie, commence enforcement actions).

      Yes, so letters to legislators would be EXTREMELY helpful. If you can get friends and family in California to write, this would be productive. Remember, local communities are required to fund their pension obligations, so this isn’t an issue just for CalPERS retirees, it’s an issue for all communities. See this story about San Bernandino’s ongoing pensions obligations. PE fund cheating reduces the amount that investors get and increases what communities have to pay.

      When this bankrupt, working-class city took the unprecedented step in 2012 of stopping its required pension contributions — arguing that it could not otherwise make payroll — other financially stressed California cities took notice: Could San Bernardino defy Calpers, the powerful agency that administers the state’s huge pension system?…

      At issue is the $17 million in back payments and penalties that San Bernardino failed to make between declaring bankruptcy in August 2012 and resuming payments in July. Calpers has maintained that it is owed in full. But now in bankruptcy negotiations, the city is hoping to pay only a fraction of that, arguing that the city’s creditors must all share in the bankruptcy pain. The amount may be small, given the system’s assets, but if San Bernardino gets a reduction, the precedent could be huge, opening the door to other struggling municipalities using bankruptcy law to justify delaying or withholding payments to the pension system.

      Attendees of a recent City Council meeting. Credit Monica Almeida/The New York Times
      “This city has taken on the 800-pound gorilla, which is Calpers,” said Ron Oliner, a lawyer for the San Bernardino Police Officers Association, which represents the city’s uniformed officers. “Everyone in California is watching San Bernardino, and everybody in the nation is watching California.”

      So CalPERS may come under even more pressure to reach for return if San Bernandino prevails, which will make CalPERS think it needs high (potential) return strategies like PE even more, making CalPERS even less willing to buck the industry, even in the face of evidence that investors have been slack on oversight.

      1. steelhead23

        Isn’t the issue even larger than California? I may be wrong, but I believe other public employee retirement systems have joined with CalPers, or have followed their lead in investing, presumably including through PE firms. Thus, the issue of investor ripoffs is not just a CA problem.

        But its your last paragraph of this response that has my head reeling. When a pension fund finds that prudent investing will not meet its long-term commitments (which can be due to folks living longer, as well as poor fund performance), reaching for yield is absolutely the dumbest way to solve the problem. It could constrain costs by making future benefits smaller, or increase revenues by increasing enrollment costs, or get funding through the state’s general fund (last resort). It is clear to me that reaching for yield has made pension funds the targets of scams. And it places pension managers in the heady world of PE – a world filled with the likes of Jordan Belfort – a bit too intoxicating, given what has transpired. I suppose the idea of reducing pension fund benefits or increasing employee contributions to ensure fund health is not very appealing, either to public employees or politicians, but if the fund managers would simply take the time to become financially savvy (and sober up) they would see that they’re the mark in this con.

  7. allcoppedout

    One can only look on in amazement from UK Secret Society (Masonic Offshore). Here we can only get 70 year old papers 95% redacted. If the Iranians lent us the Cone of Cyrus, the nearest it would get to public display would be a vault in the BoE marked ‘most secret’. An FOI request would get one a picture of the Cone with the text blacked-out some years after application, yet still conforming to the 28 day rule. Remarkable that you Americans got as far as having a judge tell you to back off and mind your manners. Process here would still be lost in the post.

  8. Greg Taylor

    While it doesn’t excuse Calpers lack of responsiveness, you might be able to turn the pdf files they’ve provided into a spreadsheet format with cheap/free optical character recognition software. I did something similar about 10 years ago with hundreds of pages of pdfs with very few errors.

    1. Yves Smith Post author

      We’ve already done that, but you cannot rely on it for analytical purposes. “Few errors” is not “no errors” and we’re talking about doing quantitative analysis. We can’t do that and perform any analysis that we can be sure is accurate unless we check EVERYTHING manually. The Oxford profs decided they couldn’t afford to do that, and they reinput everything, which was 2 solid weeks of manual labor. That is likely the reason they sat on the information for nearly 4 years (they got the data in 2009 and didn’t publish till 2013, no one wanted to do the brute force exercise of inputting the data). And our analysis has to be unassailable.

      And we don’t even have a good list of funds from them yet. They provided one recently (fund names, no data) with 856 funds. Yet we found 39 on a different spreadsheet with data of their currently active investments that weren’t in the list of 856. So by incompetence or design, they are providing data that does not match up across responses, as well as inconsistency WITHIN responses (see the discussion of inconsistency in fund names within one document in the screenshot it the post).

      Plus we have other items critical to our analysis where they either haven’t provided any data at all (and this isn’t something that is remotely as sensitive as the other stuff they’ve provided) or have provided only partial responses. CalPERS has kept pointing to the big PDF they gave to the academics, but there’s more we’ve asked for that they are conveniently not talking about.

  9. Brian

    Hope you can get free of CA court for a time with a federal court that isn’t conflicted as a recipient of CalPERS largesse. (unless/until remanded)
    Imagine if you will, A California judge that appears to acknowledge discovery was denied to you, that this discovery is the foundation of your case, that what you asked for has been admitted to exist. Is the court an agent of the defendant?
    oh, justice

  10. Greg Marquez

    I’m not seeing that you filed a government claim, which is required before filing suit against a government entity in California, is that a possibility for the ruling?

    1. Yves Smith Post author

      No, a writ of mandate is precisely that sort of filing, and that’s what we filed. Successful PRA actions have been writs of mandate.

      1. Goyo Marquez

        A writ of mandate is not the same as a government claim. At least here a government claim is usually filed on a form provided by the government entity, filed with the government entity, giving them an opportunity to settle prior to a lawsuit being filed.

        1. Yves Smith Post author

          Trust me, we used exactly the same process that top FOIA lawyers in California use. A writ of mandate is the proper form of pleading. See here for a successful PRA suit against CalPERS:

          A writ of mandate is to compel a government entity to do something it is supposed to do but hasn’t (or enjoin them from doing something they should not be doing). We aren’t seeking damages, we are seeking to get CalPERS to quit footdragging and produce documents. Under the Public Records Act, if a plaintiff prevails, it is mandatory that the court award reasonable attorney fees and expenses.

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