Our Bloomberg Story: Don’t Let Private Equity Dupe California

Our latest update on not-promising state of private equity reform in California ran at Bloomberg yesterday. The editor provided the title “Don’t Let Private Equity Dupe California” but that became Don’t Let Private Equity Keep California in the Dark.

Regular readers may recall that in the wake of SEC and media disclosures of widespread abuses in private equity, such as charging authorized fees, which in most walks of life would be called embezzlement, California Treasurer John Chiang, who also sits on the boards of mega public pension funds CalPERS and CalSTRS, proposed path-breaking private equity legislation to combat this misconduct.

Getting a full accounting of fees and costs that the private equity portfolio companies pay is critical, since major media stories and SEC settlements have demonstrated that that is where most of the chicanery takes place. The private equity firms, which have managerial control over the portfolio companies, can load all sorts of charges onto them that are paid directly from the portfolio companies to entities controlled by the general partners or to individuals close to them. That means they bypass the private equity fund entirely, thwarting disclosure and oversight.

The first version of the bill, AB 2833, introduced by Assemblyman Ken Cooley in February, seemed to fulfill Chiang’s promise. It called for the full disclosure of all private equity fees and costs, including carried interest and fees paid by portfolio companies by all California public pension funds investing in private equity.

Unfortunately, Chiang, who is the bill’s sponsor, left a big escape hatch for private equity firms, and worse, this looks to be by design.

When amendments in mid-March gutted the bill, alarmed supporters contacted Chiang’s and Cooley’s offices. They were assured the weakening of the bill was due to drafting errors and the bill would be restored to its original strong from quickly. That story changed in 24 hours. Hearings on the bill were pushed back two weeks to allow for more wrangling.

And when the pro-reform camp was pushing to have the bill restored to its original form, a key insider revealed what was really going on: CalPERS and CalSTRS would not back even the dead-on-arrival version of the bill. Their support, or at least acquiescence, is key to having it passed. Mind you, official positions on legislation are the purview of the board, not the staff. This means Chiang, who has more stature than anyone else on the board, was not willing, or more likely, never intended to arm-twist his fellow board members to back the bill, irrespective of the captured staffs’ objections.

So what are we to make of the next developments in this saga? The bill was amended again in mid-April. Superficially, the revisions appear to undo the damage done in March. But this iteration still leaves the key term, “related party” undefined. This matters because there is no standard definition and some definitions are virtually contradictory to others. For instance, a private equity firm could take the reasonable-sounding position of using the SEC definition which would again vitiate the bill, as opposed to the FASB definition as backers proposed. Moreover, the sponsors placed the bill on the “consent calendar” in the lower house. That means no hearings, and thus no opportunity to fix the fatal flaw.

As we concluded at Bloomberg:

It’s not too late to make this right. Chiang must recognize that passing the bill in its current form would represent a failure to fulfill his promise, and use his considerable power to insist on real reform. If he doesn’t, legislators must demand (or be prodded to demand) an effective fix. The financial security of millions of California public employees — and potentially other pension-fund beneficiaries across the country — depends on it.

CalPERS and CalSTRS are trying to pretend in public that they support Chiang’s bill even as they oppose it privately. Worse, the fact that they couldn’t stomach even a version of the bill that was toothless and at most purely symbolic means the odds favor it being watered down even further as it progresses through the Assembly and then the Senate. For instance, California has the unusual procedure called “gut and amend” which the state’s legislative glossary defines as follows: “When amendments to a bill remove the current contents in their entirety and replace them with different provisions.” It’s controversial because it is used to get bills through at the end of a legislative session to revive measures that were stalled. And the objection is that this ploy denies the public its right to have its say during committee hearings. But Chiang and Cooley are using a process that is every bit as anti-democratic by putting the bill on the consent calendar, which means the public is denied the opportunity to testify and in this case, to act as a counterweight to CalPERS’ and CalSTRS’ behind-the-scenes sabotage and get the bill’s shortcomings remedied.

With the effort to keep reformers well away from the sausage-making process, the bill goes next to the Appropriations Committee, having passed last week on the consent calendar in the Public Employees, Retirement, and Social Security committee. Bills that pass on the consent calendar in their policy committee are automatically recommended to be placed on the consent calendar in the Appropriations Committee. Voters can write their Assemblymen, particularly those in districts whose representatives are on the Appropriations Committee and call for the bill to scheduled for hearings. Mind you, this is less than ideal, since committees typically reveal only the day before hearings whether a bill is on the consent calendar or not, again giving insiders an advantage. But weighing in that you care about having a strong, effecitive bill and are not happy with how the public is being shut out will send an important message.

Hence it is time for Naked Capitalism readers to saddle up yet again. The most important is to call or write to Chiang and his fellow elected board member, Betty Yee, as state-level elected officials who also sit on the CalPERS and CalSTRS boards. Please urge both to push for a bill that will provide for the disclosure that Chiang promised, and not the flawed version that is now moving through the Assembly. In addition, tell Chiang that you disapprove strenuously of the public being shut out of this process via the use (as in abuse) of the consent calendar to assure that only insiders will have a say on the bill. Since taxpayers backstop CalPERS, this bill is a matter of broad interest.

Please also circulate this post to your family members, colleagues, and friends in California, particularly government employees, and encourage them to write or call. Be sure to identify whether you are a taxpayer or also a current or future California public pension fund beneficiary.

Mr. John Chiang
California State Treasurer
Post Office Box 942809
Sacramento, CA 94209-0001
(916) 653-2995

Ms. Betty Yee
California State Controller
P.O. Box 942850
Sacramento, California 94250-5872
(916) 445-2636

You can use email to contact Chiang and Yee, and we encourage you, if you write, to send the letter you sent to Yee to other CalPERS board members:

Their addresses:

Robert Feckner (President) rob.feckner@calpers.ca.gov
Henry Jones (Chairman of the Investment Committee) henmarj@aol.com
Michael Bilbrey Michael.bilbrey@calpers.ca.gov
John Chiang john.chiang@calpers.ca.gov; Grant Boyken (Chiang’s staffer; quoted in FundFire) grant.boyken@treasurer.ca.gov
Richard Costigan richard.costigan@calpers.ca.gov
Richard Gillihan richard.gillihan@calpers.ca.gov; Katie Hagen (one of Gillian’s staffers) katie.hagen@calhr.ca.gov
Dana Hollinger Dana.Hollinger@calpers.ca.gov
Ron Lind rlind1@me.com
JJ Jelincic jj@calpers.ca.gov
Priya Mathur Priya.mathur@calpers.ca.gov
Bill Stanton wjstanton@gmail.com
Theresa Taylor Theresa.taylor@calpers.ca.gov
Betty Yee b.t.yee@sco.ca.gov; Alan LoFaso (one of Yee’s staffers) alofaso@sco.ca.gov

For CalSTRS, the only contact information we have is for the board chairman, Harry Keiley. If readers have e-mail information for the remaining board members, please provide it in comments and we will update the post.

Harry Keiley
Board Chair, CalSTRS
Mobile Phone: (310) 428 3624
Email: hkcalstrs@aol.com

I request that you NOT call Keiley unless he fails to respond to an e-mail after two attempts.

If your Assemblyman is on the Appropriations Committee, I strongly encourage you to send a copy of your letter to him. Their names and contact information are here.

In addition, you can send a copy of your letter to the editorial board of the Sacramento Bee:

The Sacramento Bee
2100 Q. St.
Sacramento, CA, 95816

Or you can rework it as a letter to the editor or an op-ed and submit it using this form.

Please circulate this post widely among the people you know in California and encourage them to act. Calls, e-mails and letters are far more powerful in state politics than they are on a national level. An e-mail or letter does not have to be long to be effective. State that you are concerned that the bill is being deliberately shielded from public input, when it already has flaws that mean the private equity industry can circumvent it. And add that you are concerned that it will be weakened further given CalPERS and CalSTRS behind-the-scened efforts to weaken it. Stress that the SEC has exposed that the SEC has criticized all investors in private equity for doing a poor job of oversight, and this bill has come about only as a result of public pressure. These pension funds are serving as the stooges of the private equity industry and it’s important to let the legislature know how misplaced their loyalties are and demand that the public interest be served.

Please see our companion post today on the terms that CalPERS has accepted for its investment in a fund managed by Apollo as an illustration of the depth of capture. The SEC has warned how private equity investors have entered into unduly vague agreements with weak oversight. Chiang was concerned enough about this problem to join other state treasurers and New York state and city officials to ask the SEC for help, confirming that the limited partners were incapable of watching out for their own interests. Having correctly identified that limited partners like CalPERS are no match for private equity, don’t let him cave into their special pleading.

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  1. Chris Tobe

    We just had SB2 in Kentucky stripped and then blocked. It would have required competitive bidding, fee disclosure, and require PE firms to adhere to the CFA Asset Manager Code of Conduct which basically makes them take Fiduciary duty. Both Retirement systems KRS and KTRS and the teachers union with their PE industry friends banded to block transparency and disclosure

  2. Ishmael

    Surprised that nothing to regulate PE’s passes. The reason is state govt is corrupt and many of the state senators and representatives on the various committees that have oversight in this area get “contributions” from the PE firms. The state of California govt is corrupt to the core. The same is true for most states.

    1. Vatch

      You are correct that most (perhaps all) U.S. state governments are corrupt. However, corruption doesn’t work if no one provides the bribes ( or campaign contributions, or whatever). The Private Equity industry is also corrupt (along with many other industries). Both private business and government are corrupt in these situations. They’re two sides of the same coin.

  3. flora

    “[Alarmed supporters] were assured the weakening of the bill was due to drafting errors and the bill would be restored to its original strong from quickly. ”

    ah yes, “drafting errors”: an old legislative dodge. Never believe it. Translated roughly: ‘we drafted exactly what we want but the voters found out what was in it and complained.’
    In my state a ‘drafting error’ the lege promised to fix has left the state nearly insolvent. My state lege has refused multiple times to ‘fix’ the ‘drafting error.’ Instead, they are trying to sell off everything that isn’t nailed down. But that’s another story.

    I’ve given CalPERS and Chiang a large benefit of the doubt. Now I conclude they are fully aware and determined to collude in the PE frauds, knowing they are frauds. So, PE runs CalPERS and CalPERS runs the Assembly?

    Thanks for your reporting.

  4. susan the other

    The sunshine is working thanks to your diligence Yves. There must be a reason that CalPERS resorts to this betrayal. The obvious one is they need better returns. And only PE is dirty enough to promise it when it has no intention of doing so. PE needs honest competition. Maybe Chinese bad loan CDOs – backed by the full faith and credit of PBOC.

  5. Chauncey Gardiner

    Clicked on the link to your Bloomberg article in the first paragraph. Seems that someone at Bloomberg not only changed the editor’s title, but either the link to the article is faulty or they have pulled your article. Got this message when I clicked on the link:

    “404. PAGE NOT FOUND

    Unfortunately, we have no opinion on this topic. To discover what opinions we do have, return to the homepage.”

  6. Ed Walker

    I’d say the crucial point here is that there will not be hearings. That would give a decent legislator the opportunity to call witnesses from CALPERS to explain why they don’t want to know the amount of fees they are paying, and why they have those horrible indemnification provisions.

  7. Lamont Cranston

    I requested the names & contact info of the CALSTRS board members as it isn’t on “MyCalstrs” web site. We will see what happens…

  8. TheCatSaid

    Yves, should “charging authorized fees, which in most walks of life would be called embezzlement” be “charging unauthorized fees, which in most walks of life would be called embezzlement”?

  9. Adam Eran

    The response to e-mail sent:

    Dear Sir:

    I am writing in response to the email you sent regarding the April 26, 2016 Naked Capitalism post titled, “Our Bloomberg Story: Don’t Let Private Equity Dupe California.”

    In the blog post the author, Yves Smith, implies that the language requiring disclosure was significantly “watered down” from the original. In truth, the change was merely an inadvertent error that occurred after the AB 2833 was expanded to include fee disclosure from hedge funds and other alternative investments in addition to private equity. All bill language is reviewed and edited by the Office of the Legislative Counsel. The Counsel’s edits omitted the requirement that fees paid by portfolio funds to private equity general partners’ affiliates be disclosed. This omission has since been amended in the bill language.

    Ms. Smith also implies that legislative committees’ use of the consent calendar somehow limits public participation in the legislative process. AB 2833 was on the consent calendar for its first policy committee because the bipartisan seven-member committee unanimously decided to put it on the consent calendar. Those who support the idea of a law requiring greater private equity fee disclosure should take this as an excellent sign that all seven members, democrats and republicans alike, didn’t feel the need to take testimony because they support the bill proposal and because no opposition was filed. Even though the bill was on the consent calendar, members of the public may write to the committee or to individual committee members with their comments and concerns. Ms. Smith also implies that it was solely the decision of Treasurer Chiang and Assembly Member Cooley to place the bill on the consent calendar. This motion cannot be made by the sponsors of the bill. Rather, this motion may only be made by the seven members of the Assembly committee on Public Employees and Retirement.

    It is also important to note that there will be ample opportunity for members of the public to weigh in with testimony as the bill proceeds through the long legislative process that concludes in late summer. AB 2833 must make its way through eight additional committee and floor votes in both houses before it is sent to the Governor for signature.

    Ms. Smith incorrectly implies putting a bill on the consent calendar is somehow akin to the practice commonly known as “gut and amend” whereby a bill is stripped of its content and entirely new language is added after the initial bill has already cleared a number of its legislative hurdles. That is not the case with AB 2833, which has met all of its legislative deadlines and is proceeding in the standard process.

    Ms. Smith contends the “hearings on the bill were pushed back two weeks to allow for more wrangling.” The hearing on the bill was pushed back to allow time to make the amendment that restored the requirement that fees paid to general partners’ affiliates or related parties be disclosed, and to allow time for committee staff to write a thorough bill analysis to provide the public with more information about the bill prior to the hearing. The Assembly Public Employees and Retirement committee calendar had two hearings scheduled for the first and third week of April. Because the amendments and analysis could not be ready for the first hearing, Assembly Member Cooley’s office opted for the second hearing.

    Ms. Smith suggests Treasurer Chiang has not done enough to convince his colleagues on the CalPERS and CalSTRS boards to support AB 2833. At this point, the Treasurer has heard no opposition expressed from his board colleagues. AB 2833 will be considered by the CalPERS Board in May and by the CalSTRS Board in June. As sponsor of the bill, and as a long-time supporter of lower and more transparent fees, Treasurer Chiang will strongly urge his colleagues to take a support position on the bill.

    Finally, Ms. Smith is concerned that the term “related parties” is undefined in the language of the bill. She suggests using the Financial Accounting Standards Board (FASB) definition. The Treasurer’s Office had originally drafted language that made reference to the FASB definition of “related parties.” The Legislative Counsel, however, would not include the language because of concerns that this would unlawfully delegate California State law to the authority of FASB. We are currently working on an amendment to define the term “related parties.”

    I hope this alleviates your concerns. Please don’t hesitate to contact me if you have further questions or concerns.



    Grant Boyken| Deputy Treasurer
    Office of State Treasurer John Chiang|916.651.7427

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