CalPERS has managed to descend to a new low. Its strategy of trying to sweep fundamental problems under the rug has reached the point that the rug is not just lumpy but also starting to move.
The latest shocker (and it is shocking) is that the board has launched a plan to strip JJ Jelincic, the only board member who does his job by asking substantive questions of staff, of meaningful authority if he does not resign. This is a kangaroo court, pure and simple. Joe McCarthy would be proud.
When we asked law professor and former general counsel of the Federal Home Loan Bank of San Francisco, Bill Black, for his reaction, he was so disturbed that he wrote a post, which we are publishing in conjunction with ours. One of his major points was the board lacks the authority to take this move. He also stressed that General Counsel Matt Jacobs was acting contrary to “every normal reflex of a corporate general counsel” and was supporting rather than cleaning up “CalPERS’ corrupt culture.”
Black’s analysis is detailed as well as devastating. I urge you to read it in full.
It is also noteworthy that CalPERS is trying to keep this indefensible action from public view. This plan would have started and might have proceeded entirely in secret, save for the fact that that Jelincic not insisted that the annual board peer review be held in an open session. CalPERS scheduled the meeting to discuss stripping Jelincic of power at an offsite in Monterey, away from its Sacramento board room. Jelincic had no warning that it would include a proposal to push him off the board.
Moreover, CalPERS neither recorded a video, as it does for all open sessions in Sacramento and for most of the sessions its offsites, nor did it make a transcript for this illegitimate procedure. But we have a bootleg video, and we’ve uploaded the key section to YouTube. We have embedded the transcript at the end of this post. We’ll discuss the details shortly.
This campaign against Jelincic is proof of diseased governance. And that is no surprise since the foxes are in charge of the henhouse. CalPERS’ staff is not accountable to anyone save its board, and once in a great while, the court of public opinion. And as we have documented over the past three years, the only board member who stands up to staff is Jelinicic. The other members of the board, rather than admitting to themselves that Jelincic is doing what they all ought to be doing, instead see him as a threat and are determined to beat him down.
As CJ Latsa, a board member at Ohio’s state pension fund, Ohio PERS, wrote:
This is potentially a very serious situation. It is my hope that any trustee would be considered innocent until proven guilty and an investigation would include adequate checks and balances. Without a fair and impartial review, a board could in effect act as judge, jury, and executioner. Considering the worst case scenario, it would be a travesty if a board mistakenly unelected the people’s choice without due cause.
CalPERS members, beneficiaries, and California taxpayers should be alarmed. This is proof that CalPERS is not merely putting protecting its image over its duties to beneficiaries and taxpayers. It is operating as a rogue organization with no respect for the law. At the end of this post, we provide the names and contact information for board members and state officers. We urge you to circulate this post widely and ask friends, family, and colleagues in California to contact these public officials and tell them that you oppose this attack on a public-spirited board member and that CalPERS needs more, not fewer people like Jelincic.
CalPERS Moves to Oust or Neuter Its Only Effective Board Member
Bill Slaton, who is chairman of CalPERS’ board governance committee, led the attack on Jelnicic (see below from 0:30 to 3:07; you can also view this segment on YouTube):
Bill Slaton: Yeah, I have some more comments, and I wrote them out and thought about this a lot because after I read these comments I thought about them and I shared some of the concerns, and as I look at these and think back over the last 18 months – and Mr. Jelincic, I’m going to address you in this – that as I’ve observed, you’ve taken unilateral actions that to me are clear violations of fiduciary duty, and by implication placed our fiduciary duty as a board at risk, and the common theme is the disrespect for the governing rules of the organization.
To be more specific, I’m talking about the disregard for confidentiality of materials or decisions reviewed or made by this board, but I want to be very clear about this. The comments I’m making today have nothing to do with Mr. Jelincic’s views regarding the issues this board faces, nor is it about his fair challenges to staff and other expert opinions presented to us, and in fact, I believe very strongly that minority views properly conveyed are vitally important to fostering honest and robust decision making and board oversight of this organization, so given that there have been multiple times that this has happened over the last 18 months – and I say this only very reluctantly – there are in my view only two possible solutions to protect the fund from the risk of continued fiduciary violations. The first would be for Mr. Jelincic to voluntarily resign his board position. Although it is clear that he possesses extensive knowledge in the investment arena as well as valuable historical perspective on all matters pertaining to CalPERS, this behavior – again, in my opinion – negates the advantages he brings to the board and the constituency he represents. If he chooses to remain on the board, I ask the board president to place on the board agenda as soon as possible an action item regarding a sanction or sanctions to be imposed by this board, and one sanction I ask to be considered would prohibit Mr. Jelincic from attending any closed sessions conducted by any committee or the full board while he remains a member of this board due to his repeated unauthorized disclosure of confidential material.
Let’s unpack this. We’ll stick with the big issues for now and return to the finer legal points in later posts.
Slaton accuses Jelincic of leaks of “confidential material” without offering so much as a single example. This is nonsense. First, as Jelincic points out immediately after this demand, he has repeatedly been accused of releasing confidential information that other board members had disclosed. Jelincic maintains that due to this history of the board making false charges against him, he has been vigilant about maintaining the secrecy of matters discussed in closed session, which by law board members must protect.
Second, the odds are high that Slaton and his allies have no idea what “confidential information” amounts to and are trying to string up Jelincic for discussing matters that are not confidential. Notice that later in the session, board member Richard Costigan, one of the two lawyers on the board, effectively says that the line between what is confidential and not confidential isn’t always clear cut, and as a practical matter, it is difficult to keep track of what was said in closed session versus open meeting. He also stated, regarding breaches of confidentiality, “[A]ll of us are guilty of it.”
Again, recall the show of outrage by virtually all members of the board when Jelincic dared to obtain information that staff had improperly denied him using the California Public Records Act. Every independent legal expert deemed CalPERS’ refusal to be unlawful. A board member should never be denied an information request, particularly one any member of the public could get. Yet the board circled its wagons in trying to keep Jelincic in the dark. This is part of a pattern of the staff and board working together to try to put a veil of secrecy around CalPERS that is far greater than allowed by law.
Third, consistent with Costigan’s remark, there are many times when information in closed session has been made public, yet heretofore the board had never made an issue of it. For instance, in this open session video, from 06:52 – 07:12, Réal Desrochers ineptly discloses a number that he says is subject to closed session. While Desrochers might be forgiven for making a slip, in 2011, Chief Investment Officer Joe Dear (now deceased) announced that he was going to give his macro-economic briefing to the board in open session, after it had previously been discussed only in closed session for years. Note that no change in law occurred nor was there any board vote taken. It instead appears that Dear recognized that there was no legal basis for having this discussion in closed session.1
As former chief investment officer and public pension fund trustee Andrew Silton wrote:
A bit more than a year ago, I suggested that CalPERS had lost its way (see, a bit more than a year ago, I suggested that CalPERS had lost its way (see, http://meditationonmoneymanagement.blogspot.com/2015/12/from-leading-way-to-losing-its-way.html) as a pension organization. After watching Bill Slaton encourage JJ Jelencic to resign or face an inquiry by the full board about unspecified revelations of confidential information, I suspect CalPERS faces even deeper issues. The integrity of CalPERS has been put at risk by Mr. Slaton. Mr. Jelencic has a healthy skepticism of the consultants, staffers and experts that appear before the full board and investment committee. Skepticism is what keeps pension plans and investment organizations from committing major mistakes. Moreover, Mr. Jelencic appears to enjoy the confidence of the current and retired employees who have twice elected him to his seat on the board.
If CalPERS has specific information that Mr. Jelencic violated any policy, that information should have been furnished to Mr. Jelencic in a proper manner. Instead, Mr. Slaton used a session of an off-site to impugn Mr. Jelencic’s integrity. I’m disappointed that Mr. Jelencic’s colleagues could only marshal a meek response to Mr. Slaton’s unfair innuendo. Perhaps a reprimand or a resignation is warranted, but it isn’t Mr. Jelencic who should be facing those potential consequences.
Slaton says these alleged disclosures threatened the board’s execution of its fiduciary duty. Remember, we don’t know exactly what if anything Jelincic allegedly did, but the charge is that Jelincic did grave damage to the board’s ability to execute its fiduciary duty is absurd.
For starters, Slaton’s claim assumes the board is currently performing its fiduciary duty, which as we have repeatedly documented, it isn’t. The onus then is on the Slaton and his co-conspirators to demonstrate that if Jelincic disclosed information impermissibly, it was harmful.
In fact, it is a near-certainty that the board members’ beef is that Jelincic has been, as they often indignantly complain, “embarrassing the system.” Yet as the entire board was told in its fiduciary training immediately before this meeting, CalPERS’ board has no fiduciary duty to CalPERS the organization, meaning its employees. The board’s and staff’s duties are solely to the beneficiaries.
The barmy logic of believing that board members should avoid “embarrassing the system” at all costs means they should have covered up former CEO Fred Buenrostro’s taking bribes from placement agent Al Villalobos, a crime which led him to be sentenced to four years in prison. That shows how far the CalPERS board has departed from any semblance of understanding what “fiduciary duty” means.
Slaton proposes a star chamber to impose an illegal sanction. Keep in mind that if Jelincic really were taking closed session material and making it public, there’s a simple and clean remedy: go to a district attorney and have Jelincic charged. The fact that the board is not willing to use this route suggests that they are not prepared to subject their evidence, if any, to a formal process in which Jelincic can examine it and offer counter-evidence before an impartial judge.
While most of the board members seemed uncomfortable proceeding with a formal matter against Jelincic, none had the courage to challenge Slaton. If you watch carefully, you will see that the ones who are keen to punish Jelincic are Slaton, board president Rob Feckner, and Priya Mathur. Feckner says he has had “many conversations” with the general counsel on this matter (and please read law professor and former general counsel Bill Black’s assessment that Jacob’s role is partisan and the advice he is giving is not just wrongheaded but actually destructive to CalPERS). Priya Mathur is a zealous defender of staff as a result of the organization repeatedly coming to bat for her in the wake of numerous transgressions, such as failing to file required disclosure forms and repeated unexplained absences from board meetings.
Even though some board members, unlike Slaton, used the word “trial” to describe the meeting at which the board will persecute Jelincic, that looks to be an effort to have a “make it up as you go along” process seem more legitimate than it will be. Even so, Ron Lind, was clearly uncomfortable with the prosecutorial nature of Slaton’s proposal and called for a more traditional informal approach.
By contrast, Priya Mathur was pushing to have the proceeding take place in closed session, with the result that there would be no public record and no accountability whatsoever. Board president Rob Feckner said he also preferred this route but conceded it might be necessary to have all stages, and not just the final decision, held in open session. With Jelnicic already a black sheep, a secret hearing would mean formalities are irrelevant and the fix is in. That is doubly true given that Feckner acknowledged that since Jelnicic has been accused of leaking, any material at issue is already public, so there is no danger of harm in discussing it further in a public meeting.
Slaton gives lip service to appreciating Jelincic’s dissenting views. Notice Slaton’s elaborate disclaimer that he values Jelincic’s opinions. It is unlikely to be an accident that this carveout came shortly on the heels of our post on the importance of courage and independence as critically important qualities for board members.
Yet notice that Slaton refers specifically to Jelincic’s actions over the last eighteen months as the basis for the effort to oust him. Gee, what started happened then?
That was when what ought to have been easy peasy questions from Jelincic about private equity resulted in senior staff providing answers that deservedly made CalPERS the laughing stock of the fund management industry.
In June 2015, Chief Operating Officer Wylie Tollette not only admitted CalPERS had no idea of what it was paying in private equity carry fees, but falsely claimed that it was an “industry problem” as if no one could get the information. In fact it is typically disclosed in the audited financial statements that all limited partners receive. Investors like South Carolina’s pension fund have been able to get the data in the cases where it readily available. After a firestorm of bad press, CalPERS reversed itself and set out to get the information, which it eventually published.
Similarly, in August 2015, Jelincic asked the head of private equity, Réal Desrochers, what should have been a simple question about management fees. Despite Jelincic coming at it several ways, Desrochers gave answers that made clear he had no understanding of how private equity fees work.
These are stunning lapses, yet the board has been remarkably unconcerned. And worse, they are trying to depict Jelincic as somehow undermining the board’s execution of its fiduciary duties. In reality, the board’s failure to investigate stark evidence of a lack of competence and/or diligence by these two staff members alone is a prima facie case of the board’s failure to perform its fiduciary duty. In other words, they are scapegoating Jelincic for having exposed deep-seated problems at CalPERS and are falling down on their jobs by refusing to address these issues.
Why Jelincic Is Being Attacked
Jelincic has come under repeated attack, in some cases orchestrated by the staff that the board nominally oversees. For instance, we chronicled how the giant pension fund engaged a scandal-ridden fiduciary counsel, Robert Klausner, apparently for being willing to say whatever its client wanted to hear, regardless of whether the advice was legally sound. Klausner then led a board discussion that one reader called a “hating on JJ” session where one board member, Michael Bilbrey, argued that nobody on the board should be asking questions of the staff publicly.
Several members of the board sharply criticized Jelincic for using California’s version of FOIA to get access to records available to the public that staff had refused to provide him. That level of insubordination should be completely unacceptable, as several law professors pointed out. However, in the Alice in Wonderland world in which CalPERS lives, anyone who tries to hold the institution accountable, including board members entrusted to do precisely that, must be checked.
CalPERS’ board and staff are either inexperienced journalistically or maliciously pretending to be.
The critical coverage of CalPERS on Naked Capitalism is one of the big sources of the board’s anger towards Jelincic. They seem to naively believe that the only way anyone could do the kind of detailed analysis and reporting that we have provided must have been fed information by an insider. And since they see that I have regularly reported on Jelincic’s questions in open session and the staff’s inept answers, or worse flat out lies, they further assume Jelincic must be the source.
Had they bothered searching the site’s archives, or read my book, they would see I have become expert on topic areas more difficult than anything I have written about with respect to CalPERS, including collatearlized debt obligations (as in cracking how they are structured and documenting their outsized systemic impact in the crisis), the mechanics of mortgage securitization and servicing, including how pooling & servicing agreements work, how contractually-stipulated securiticazation procedures broke down, the implications of those chain of title abuses for the ability to foreclose in various states, and the ramifications for banks, investors, and regulators.
CalPERS’ legal department and board further appears not to understand what information about CalPERS and some of its important counterparties is public, and in particular, how some of that has been made public by independent parties. It also appears to lack the imagination to consider that I have been contacted by current and former CalPERS employees, have successfully sought out former senior officers, and also have long-standing relationships with senior members of venture capital and private equity firms.
What You Can Do
As we have demonstrated in the past, writing and calling state officials is effective. Please let urge everyone you know in California to take action.
Bill Slaton was appointed by the Governor. Please write or call Governor Jerry Brown’s office and tell him that governance at CalPERS has become a travesty, with his appointee Slaton as a prime example. Describe how Slaton is trying to implement a legally impermissible sanction against an effective trustee voted in twice by members. Tell him that he needs to ask Slaton to resign. Be sure to cc Slaton.
Governor Jerry Brown
c/o State Capitol, Suite 1173
Sacramento, CA 95814
Phone: (916) 445-2841
Fax: (916) 558-3160
E-mail contact form: https://govnews.gov.ca.gov/gov39mail/mail.php
Send a cc to:
Mr. Bill Slaton
Board of Administration
Lincoln Plaza North
400 Q Street
Sacramento, CA 95811
Please also contact the two elected officials on CalPERS’ board, John Chiang and Betty Yee. Betty Yee was present at the board session that Slaton led and did not object. Her silence implies consent.
Mr. John Chiang
California State Treasurer
Post Office Box 942809
Sacramento, CA 94209-0001
Ms. Betty Yee
California State Controller
P.O. Box 942850
Sacramento, California 94250-5872
In addition, if you are a California citizen, please alert your state Assemblyman and Senator, and demand that they look into this serious lapse of governance. You can find you Senate and Assembly representatives here.
Thanks again for your help.
1 From the transcript of the December 12, 2011 meeting:
CalPERS January 19, 2017 Transcript
CHIEF INVESTMENT OFFICER DEAR: Mr. Chairman and members of the Committee, this briefing is billed as the Roadmap Report, but it is a way for this meeting only to pull up what will become a regular part of the agenda, which is a briefing from the Chief Investment Officer to discuss the major issues and concerns that we have as a way of setting a context for the meeting. So for the benefit of the audience, the idea here is to bring forward kind of what’s on our mind in the Investment Office to situate the portfolio and the challenges we have, in terms of the agenda for the meeting. Portions of the economic briefing that I used to do in the closed session will be brought forward, and I’ll do that momentarily into the public session. And the commentary that I have typically done in my CIO Report to the Board of Administration will also become part of this briefing. So the Board of Administration report on Wednesdays will be much more focused strictly on updates on portfolio performance. As with any of our reports, just if you have a question along the way as I talk, please feel to interrupt. This briefing will make general observations about the state of the world, the markets, and our portfolios.