As we wrote in a companion post today, CalPERS has engaged in systemic, massive copyright infringement for the better part of a decade. Based on the scale and the willfulness of the theft, the two biggest victims, Dow Jones and the New York Times, are each likely to secure eight-figure settlements were they to pursue their claims. Other publications have the potential to win large settlements. Given how starved newsrooms are for revenue and how flagrant CalPERS’ misconduct has been, it is hard to image that CalPERS will not have to write some very large checks.1
CalPERS seems to have relied on the idea that no one would discover its intellectual property theft. This is a remarkable and reckless justification for misappropriation from publishers. CalPERS did not password protect its Daily News Summary site, so anyone who had the address could view it, as we have since at least 2015. CalPERS should have recognized that former employees and others familiar with the site could pass on the address. In other words, not only was CalPERS a brazen and large-scale crook, it was a stupid one as well.
This incident provides yet another example of failed governance at CalPERS, both at the executive and board level. Given how many employees CalPERS has, and the importance of intellectual property rights, it is inconceivable that professionals at CalPERS, particularly lawyers and information technology specialists, could not have noticed that articles were being reproduced in full with no evidence that CalPERS had any right to do so.
As media and whistleblower lawyer Jim Moody wrote:
Heads ought to roll at CalPERS. I wouldn’t want to blame a low level guy in the IT department, but even someone who was putting this site together should have said, “You know this isn’t right.” And the general counsel when he came in should have done an intellectual property audit, just the same as doing an asset audit when he took over, and put a stop to it immediately. Similarly, any head of IT knows to do a license audit to make sure you are making payments on all the licenses you should have for the software you are using. And the board members are also remiss. The audit committee is supposed to make sure controls were in place to prevent this sort of thing from happening. Lots of people are really sloppy.
CalPERS will be inclined to throw the current head of the Communications and Stakeholders, Brad Pacheco, who is a direct report to CEO Marcie Frost, under the bus. That would be scapegoating. The news site was launched in 2009, long before Pacheco in charge of the communications function. The media department did not launch its Daily News Summary in the dark of night. Its budget had to have been approved at a higher level and the development of the site fell to IT personnel, or in current CalPERS-speak, members of the Operations & Technology Department.
Moreover, Pacheco is not an attorney. His former boss and predecessor, Robert Glazier, was an attorney and was in that role from at least 2012 through 2015. The former Chief Executive Officer, Anne Stausboll, was also an attorney. Even if Pacheco thought something was improper about cutting and pasting articles from sites that were copyrighted, he may have thought that there was career risk in rocking the boat, since the legal ramifications were over his pay grade and merely linking to outside articles would be perceived to be a downgrade of the service.
In other words, even though Pacheco is technically responsible, media relations is politically weak and not a control function. Even if Pacheco had cleared his throat, the odds were high that he’d be accused of being a worrywart.2
Where Should the Buck Have Stopped?
The most clearly culpable party is the General Counsel, Matt Jacobs. He joined CalPERS in July 2014. One of his most important duties as incoming General Counsel was to review the adequacy of controls. As we stated in our companion post, an intellectual property audit is a standard housekeeping procedure in any well-run large organization. For non-tech companies, the main purpose is to assess the exposure to intellectual property claims from outside parties and take preventive steps.
And independent of an IP audit, it is inconceivable in the course of the last three years that Jacobs did not see the Daily News Summary. His failure to take notice of the flagrant copyright abuse is incompetence of the first order. His lack of vigilance is now likely to cost CalPERS tens of millions of dollars.
Bear in mind that tomorrow, the board is scheduled to authorize an increase in Jacobs’ compensation increase, a precursor to an expected pay raise. We’ve chronicled Jacobs’ numerous performance failures and called for him to be fired, most recently for his role as ringleader in the censure of board member JJ Jelincic, which law professor and white collar criminologist Bill Black called a “kangaroo proceeding”. If he instead gets a pay boost, this will prove that CalPERS is beyond redemption and that Marcie Frost herself needs to go for rewarding such incompetence.
Another group that bears direct responsibility for the huge bills that CalPERS is likely to face comprises the board members on the Risk and Audit Committee. Their duty is to make sure that CalPERS has adequate controls in place. CalPERS appears to have neither an intellectual property nor an information technology audit.
And it isn’t as if this is the only place CalPERS has been dropping the ball. CalPERS manages over $300 billion of funds, yet has glaring holes in its financial risk controls. As we wrote in CalPERS Uses Unqualified “Expert” to Validate Its London-Whale-Style Deficient Risk Management:
CalPERS has the foxes running the henhouse. It has the unit that is tasked with “overseeing” compliance and risk management for investments, which is clearly the biggest area of risk for CalPERS, in fact supervised by the parties it nominally oversees. What this means is that the joint investment risk management/compliance function (already an irregular arrangement; they are generally kept separate since the expertise required is different) reports to the Chief Investment Officer. Worse, the CIO also sets the compensation, including bonuses, of the managers in this unit.
This structure is so clearly bogus that CalPERS has objected to it in the past at other investment firms.
Since we published that post, the Wells Fargo fake accounts scandal became national news. Wells had precisely the same defective risk management structure, that of having the risk control function report to business unit heads, which in this case included the executive running the Community Bank, Carrie Tolstedt. Yet despite the obvious danger this poses to CalPERS, as well as, ironically, the managers who oversee these entities (Tolstedt, like as the JP Morgan Chief Investment Office, Ina Drew, was forced out), the giant pension fund refuses to put sound risk controls in place.
Moreover, this deficient arrangement has already failed at least once. Not only did the improperly embedded compliance unit fail to catch insider trading, but two employees who tried escalating the matter were fired, leading the SEC to review the case. But even more troubling, as we recounted in our post, Matt Jacobs misrepresented both securities law and the implication of the SEC’s intervention to the board. This behavior is totally inconsistent with what his job should be, which is to protect the organization, most importantly, the beneficiaries. Instead, Jacobs clearly sees his role as all about protecting the incumbents and preserving the staff’s freedom to operate without interference from, meaning proper supervision by, the board.
The members of the Risk and Audit Committee are:
Dana Hollinger, Chair
Ron Lind, Vice Chair
While all of these individuals are guilty of dropping the ball, the ones who deserve the most opprobrium are Dana Hollinger, who is an attorney, and Betty Yee, the State Controller, who are or at least should be savvier than the other committee members. It is appalling that no one on this committee, but these two above all, even thinks to question the existence of the news site, particularly when the media department e-mailed all board members about the new releases every business day.
It is also shameful that Board President Rob Feckner and Bill Slaton made a priority of hounding the one board member who is at all vigilant, JJ Jelincic, over trumped-up charges, while presiding over what will probably a hugely costly dereliction of duty in their own back yard.
There is a special irony here. Jelincic was punished for allegedly “leaking,” meaning sharing confidential information with the public. Note that Jelincic has repeatedly insisted the information was already public. He has been subjected to the equivalent of a gag order which prevents him from rebutting the secret charges made against him.
We now know that CalPERS itself engages in sharing — unlawfully — on a scale orders of magnitude greater than anything Jelincic was ever accused of doing. There has never been an iota of evidence that any of the charges against Jelicic, even if true, harmed anything other than board and staff egos. The piffling sanction against him was consistent with that. By contrast, the lead actors in the campaign against Jelincic, namely Bill Slaton, Matt Jacobs, Rob Feckner, and Priya Mathur, all grotesquely neglected their duties to CalPERS while harassing the lone board member who is serious about protecting the institution.
Moreover, in its ongoing effort to muzzle Jelincic, later this week the CalPERS board will debate a rule change subjecting to censure any “Board member wishing to share an article or other item with fellow Board members” unless the sharing occurs with the permission of the organization CEO after “the CEO independently determines that the item will contribute to the board’s understanding of a matter that is within the subject matter jurisdiction of CalPERS.”
Note that this proposal did not result from a sudden concern that articles could be passed around without proper regard for copyright. Perish the thought! This is the CalPERS board, having seen what independent oversight looks like in the person of JJ Jelincic, continuing to surrender what shreds of authority it retains for the sake of preventing Jelincic from showing them embarrassing news stories about themselves.
What You Can Do
CalPERS’ members and beneficiaries, and ultimately state taxpayers, will be stuck with the cost of this fiasco. I strongly urge you to circulate this post. As you have demonstrated in the past, writing and calling state officials is effective. Please urge everyone you know in California to take action.
Dana Hollinger and Bill Slaton were both appointed by the Governor Jerry Brown. Hollinger’s term expired in January but she has yet to be replaced. Even though Slaton’s term does not expire until 2019, if the Brown were to tell him to resign, it would be difficult for him not to comply.
Please write or call Brown’s office. Tell him that governance at CalPERS has become a travesty, with the cronyistic conduct of Slaton and stunning oversight failings of Hollinger and Slaton as prime examples. Brown bears significant responsibility for this scandal by appointing board members who were all too happy to defer to CalPERS’ staff.
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
Please also contact the two elected officials on CalPERS’ board, John Chiang and Betty Yee. Both are at risk of incurring the wrath of the powerful media and technology companies whose patents and licenses are often critical to their profits and even survival. Having a high profile state agency caught stealing intellectual property on an unprecedented scale on their watch says they can’t be bothered doing their jobs. If they can’t be trusted at CalPERS, why should anyone vote for them ever again?
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
Finally, alert your state Assemblyman and Senator, and demand that they launch an investigation. The legislature is the only thing CalPERS fears, so it is productive to tell them how troubled you are by the rampant governance failures at CalPERS. Point out that they should be deeply concerned about how CalPERS’ unprecedented intellectual property theft will raise hackles in Silicon Valley and Hollywood if not addressed quickly and decisively.
Even though board member Ron Lind, appointed as a public representative by the Senate Rules Committee and Speaker of the Assembly, has questioned staff more often than most of his peers, he needs to up his game in a big way or leave the board as well.
You can find you Senate and Assembly representatives here.
As the former co-head of McKinsey’s organization practice, Doug Smith, summed up this sorry situation:
CalPERS does not get some sort of free ride or pass with regard to basic controls — even hygiene — regarding intellectual property rights. Look, there are manifold risks confronting complex organizations such as CalPERS: IP risks, risks of staff misusing technology, risks of technology breaches, risks of terrible or even self-dealing/bribe based investment decisions, risks of any number of personnel related wrongs, risks of accounting fraud, risks of exposure from handing over too much to private equity, risks of poor hiring — and the list goes on. It takes work and discipline to have controls in place to manage these risks. And the General Counsel, CEO, senior executives and Board ought to know that neither laziness nor stupidity is a defense.
CalPERS has demonstrated repeatedly that its current executives and board are unwilling to reform their conduct and see themselves as accountable to no one, including the law. The only hope for desperately needed change is if culpable key players, such as Jacobs, Hollinger, and Slaton, are forced out and replaced with leaders who are willing to do the hard work of turning around CalPERS’ toxic culture. And if CEO Marcie Frost is not willing to accept this responsibility, she needs to go as well.
1 CalPERS’ legal team may seek to give top executives and board false assurances. We describe in our companion post how the copyright is a strict liability statue and CalPERS can have no reasonable expectation that it could win in court were it to fail to reach a settlement with any aggrieved publishers that have copyrights for the purloined articles registered with the Copyright Office. Because CalPERS has taken its website down and may have already tried to destroy those records, its staff may also claim there is no evidence of its abuse. As we describe, we downloaded all of 53,113 articles as in their original HTML format from inception of its news summary site through June 9, 2017 and can show the provenance of the downloads.
2 However, anyone with survival instincts should have papered up a record raising doubts and recommending changes to prevent himself from being scapegoated if and when the chickens came home to roost.