CalPERS Election Vendor Votem on Verge of Failure Just as CalPERS Board About to Approve “Business as Usual” Election Notice

CalPERS CEO Marcie Frost looks to have set up the board for a huge embarrassment. Indeed, this post is doing her a favor of sorts, since the organization will have the chance to abort the approval of election notice for the upcoming board elections that was set to be approved tomorrow.

The election notice calls for CalPERS to provide online, phone, and Internet voting, when CalPERS’ Internet election vendor Votem, has fired nearly all its staff, including the ones promised to work on its account, and has high odds of not being in business by the time the election rolls around.

We warned in a January 14 post that Votem, like its predecessor, was likely to default on any agreement due to financial distress. This call looks to be correct, charitably assuming that CalPERS has actually managed to sign an agreement with Votem (we described at considerable length then why the way CalPERS wanted to do that was a non-starter). If CalPERS has no agreement with Votem, it is still remiss, because its election notice has details that work only if Votem were to be the vendor, and by having the board approve it with no agreement in place, it would give Votem considerable negotiating leverage.

On Tuesday, Cleveland Scene reported that Votem Corporation had failed but later had to revise the story to say Votem had missed a payroll and fired nearly all its employees. Cleveland Scene also made clear that it doubted some of Votem’s claims about its current condition:

Update: This article’s previous headline stated that Votem had closed and that all employees had been fired. CEO Pete Martin told Scene in an email that while the company had “kicked off a restructuring and recapitalization” plan on Friday that included “major layoffs,” Votem is still in operation and actively supporting current customers. Scene can not verify that and sources say that is not the case.

Votem’s official version does not inspire confidence. From The Block:

“Last week the company ran into short-term liquidity issues resulting in restructuring and recapitalization of the company, which included layoffs. The company is still operating with a skeleton crew and although our future is in question, we are working tirelessly on multiple fronts to positively turn around the situation. To be clear, we have employees and are actively supporting our current, active customers,” said CEO Pete Martin.

Cleveland Scene also reported that Votem fired all the employees it hired from CalPERS’ former election vendor, Everyone Counts, which went out of business right before it was supposed to count the 2018 election. This matters because documents we obtained in a Public Records Act request showed that Votem had assured CalPERS that all of the Everyone Counts employees who had been working with CalPERS would be retained.

As we pointed out, because Votem had acquired only the assets of Everyone Counts, the last election was counted by Votem when Votem had no legal relationship with CalPERS. CalPERS misled the board and took steps to give the impression that the former vendor, Everyone Counts, managed the tabulations.

Understand how serious this lapse was. CalPERS’ member database was in the hands of an outside party with whom CalPERS had no contract whatsoever, no agreement to maintain confidentiality, no agreement to return the records, and no basis for asserting liability if any of that data was purloined or got out into the wild.

The Block reported that Votem had tried to raise funds in a Series B round from a venture capital firm, but that deal appeared to have fallen through. The Block also published this account from a self-proclaimed former employee:

They barely tried and didn’t even come close to making a dent. Total incompetence from the leadership team and Pete Martin particular. I hope anybody thinks twice before doing business with him. He is neither competent nor, in my opinion, honest,” a user claiming to be an ex-Votem engineer wrote.

How are we sure that CalPERS intended to use Votem? You can see the fingerprints in the election notice at the end of this post. You can also view it here.

Recall that for the last two election cycles, CalPERS had two companies working together via an operating agreement that CalPERS misleadingly called a joint venture. A large printer, K&H Printing, which prints many of the ballot types certified for use in California, has a small side business it operates under the dba “Integrity Voting Systems”. K&H not only printed and mailed the CalPERS ballots, but its Everett, Washington facility was the return address for the paper ballots. K&H opened and scanned the ballots.

The Internet voting vendor, Everyone Counts, handled the Internet voting, the phone “channel” and also ran the customer support line (for things like getting a replacement ballot or a PIN for voting online). Remember those ballot images that K&H scanned? They were sent to Everyone Counts to tabulate along with the phone and Internet voting totals. That process, and the announcement of the results, took place at the Everyone Counts office in La Jolla, California.

If you look at the election notice, you see this customer service phone number:

This is an Everyone Counts phone number which Votem apparently acquired when it bought the assets of Everyone Counts. This screenshot comes from a search on “Teachers’ Retirement System of Louisiana” + “Everyone Counts.” Everyone Counts managed an election for the Teachers’ Retirement System of Louisiana:

This part of the election notice shows that CalPERS again intends to open and scan the paper ballots in one place and have the official tabulation in another:

The first address is of a K&H Printing facility in Everett, Washington. CalPERS 2018 election notice listed same street address, but a different suite number. Both the 2018 and 2019 notices show the same La Jolla address for the tabulation.

We will take the liberty of hoisting sections of our January 14 posts on Votem. First, our comments on its obvious financial weakness and the CalPERS failure to do due diligence:

Why Votem Corp. Looks Shakier and Shadier Than Everyone Counts Did

It’s a safe bet that Everyone Counts was on the verge of bankruptcy. It’s hard to come up with any other reason for defaulting on the “joint venture” when it would have taken Everyone Counts only a few days more to complete its obligations to CalPERS for the 2018 election.

The apparent business failure of Everyone Counts should have alerted CalPERS to the fact that Votem, a smaller company with what looks like weaker backing, could also default on any agreement due to running out of money. Yet CalPERS did no financial due diligence on Votem whatsoever. 6

As we indicated at the top of this post, the press has taken up near-universal expert concerns about the integrity of mere electronic voting, meaning the use of equipment not connected to the Internet in local polling stations, as being so tamper-friendly as to necessitate that they generate paper trials or be replaced with voting systems that do. If neither of those can happen, officials need to reinstitute paper ballots to assure election integrity. Internet voting is obviously leagues more risky.

That means that Votem now faces a hostile environment and a contracting market for its services. Governments, far and away the biggest targets for Internet voting, are rapidly backing away from insecure voting systems. Parties that run private elections have to be reading the RussiaRussia! press. Many of them won’t want to risk criticism by taking an Internet voting flier any time soon. And it is unlikely Internet voting will stand up to more tires-kicing. 7

Everyone Counts was a vastly more substantial business than Votem is. Everyone Counts was founded in 1997, had estimated annual revenues of $15 million, and roughly 90 employees. It also had $30 million of funding. And it had a much higher press profile, as witness that it featured prominently in the Atlantic story we cited earlier.

Votem was founded in 2014. It had 24 employees before acquiring the assets of Everyone Counts.8 It appears to have raised under $3 million in funding: “less than $1 million” from founder Peter Martin. The Fast Facts” sheet it gave to CalPERS said it raised $1.2 million in a Series A round from 14 individuals and roughly $360,000 in a Bitcoin-like “initial coin offering” (ICO) from five individuals.

Using an ICO for fundraising for development of its voting platform is a huge red flag. It says Votem had to resort to a gimmick which is widely regarded as a scam and which the SEC has decided to crack down on aggressively, in a marked departure from its usual complacency.

Mind you, Votem did make a Form D filing with the SEC saying it was making an unregistered securities offering with its ICO. However, the SEC is taking a very tough stand and has subpoenaed many ICO issuers over whether they complied with the usual exemption cited for making an unregistered offering, that of selling the securities only to “accredited” investors, meaning individuals with over $1 million in net worth or $200,000 in annual income. The SEC is seeking disgorgement and payment of fines in the event of violations.

While CalPERS did ask Votem about past and pending litigation, it didn’t ask whether the SEC had subpoenaed Votem, another due diligence lapse.

And even if Votem did comply fully with SEC requirements, there is still cause for concern. Votem didn’t do a conventional funding with its current investors or try to expand the base of investors in its company. That does not speak well to the confidence of Votem’s investors in its business.

On top of that, at least one of Votem’s major investors might deter others from joining. We obtained the names of all 14, which Votem did cough up when CalPERS insisted. Earlier, Votem had identified only its “>5%” investors, in addition to its founder/CEO Peter Martin.

Top of that list of major investors, and out of alphabetical order, implying it was the largest, was:

Greg Landegger (Parsons Whittemore Family Office)

Parsons & Whittmore is an Alabama paper mill family. The patriarch of the Parsons & Whittemore family, George Landegger, pled guilty in 2015 to a Federal criminal charge of hiding assets in a Swiss bank account. It is very likely that some, and probably most, of the money managed by the family office comes from George Landegger.

As our Clive pointed out:

Even if we’re generous and say Votem has $3M in funding, that barely covers worker comp. Thirty employees earning £100k a year would burn that in a year. Or sixty people drawing $50k a year [remember, Votem has said it will take the Everyone Counts employees that were serving them, it likely has to make similar commitment to the other four Everyone Counts clients it hopes to convert]. The ICO prospectus lists over ten employees just on the coin side of the business which has no discernible income stream.

They’re likely going to need additional funds to survive to the end of 2019, unless they get some significant sales volumes coming through on the electronic voting platform.

Yves here. Back to the current post. The idea that the even-weaker-than-Everyone-Count company Votem was likely to fail was obvious. It turns out the Cleveland business community was skeptical of the company and its backers, but somehow CalPERS didn’t sus that out. From Cleveland Scene:

One local entrepreneur who preferred to remain anonymous because of their connections with Votem told Scene that the company’s fate was “exactly what [they] expected,” and that it was a bad look for both Cleveland and the Blockland initiative [founded by local auto dealer Bernie Moreno].

They admitted that while local entrepreneurs sympathize with the employees losing their jobs, many of them are probably greeting the Votem news with pleasure — “What’s the German word? Schadenfreude?” — because it validates many of their doubts and warnings about the hype over Blockland and blockchain start-ups generally.

But even worse,CalPERS ignored the risk and appears to have taken no preventive measures.

And this part of one of our January 14 posts on Votem has also held up well:

This mess sits squarely on CEO Marcie Frost’s desk. She is setting up Doug Hoffner, whose name is on the signature line of the yet-to-be-signed contract amendment, to get a massive raise, from roughly $187,000 to as much as $312,500. It appears he is to be rewarded for his burgundy-wearing enforcement of staff showing support for Frost having lied about her education, which was evident in an earlier Public Records Act response, and other demonstrations of loyalty. His failure to take notice of and do damage control for this fiasco show that he regards the substance of his job as unimportant. And that is likely an accurate reading of Marcie Frost’s priorities.

The board needs to wake up and smell the coffee. Either Marcie Frost shapes up and gets her priorities straight, or she needs to be told to find a new job.

CalPERS 2019 Election Notice
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23 comments

  1. ChrisPacific

    I’ve seen announcements similar in style to that Votem one before. It means: We’ve wound up the company as an effective business, but we have some revenue still due from customers under existing licensing and service agreements that we’d really like to continue collecting for as long as we can, so we’re going to do a Weekend At Bernie’s act for a while and hope that at least some of them aren’t paying attention too closely.

    “To be clear, we have employees and are actively supporting our current, active customers,” said CEO Pete Martin.

    Wave for the nice customers, Bernie!

    If CalPERS deigns to notice this post at all they will probably continue with their usual contrarian approach to anything NC related, and declare that Votem is just pining for the fjords.

    Reply
  2. The Rev Kev

    Gawd, here we go again. They really cannot get their act together, can they? Couldn’t even organize an orgy in a brothel. So they are going to depend on this Votem mob to do their elections. A company that is teetering on being defunct with no money and few employees. Votem would have a better chance of success by going to the UK to get a ferry contract instead. I think that CalPERS missed the boat here. If they had either one of those unaccountable private equity firms up and running, they could have gotten one of them to throw Votem a financial lifeline for them but with the perfect cut-out partner. It seems strange that even though Votem virtually has a contract in hand with CalPERS alone, they could not convince anyone to extend them finance to go for a few more months. Is that the sound of ticking that I can hear?

    They seem to be a very strange mob this Votem. They are based in Cleveland, Ohio so my apologies to any readers from that great State but I view any stories to do with voting and that State with suspicion after the past few elections. More so if it involves computer voting. They claim that they want to log one billion votes through its platform by 2025. Yeah, that’s not going to happen. They also said that they want to do business in the US and North America but if not, then those places can go and get stuffed. What they actually said was that “We will do business in countries that are more progressive” but it amounts to the same thing. What snagged my interest was in a linked article that mentioned how they also tallied votes for the Emmys, Oscars and Rock & Roll Hall of Fame among others. The Oscars? Excuse my tin-foil hat but is that how a Jihadist PR unit manged to win themselves an Oscar for a film about their work back in 2017?

    It certainly seems strange that K&H Printing does the scanning of the ballots in their home town of Everett, Washington but that they are not tabulated until they are sent to La Jolla, California. Why bother to split what should be two halves of the one function into two places 1,275 miles apart? Did K&H Printing get the job on the recommendation of one of Marcie Frost’s Washington buddies? How about throwing some business to a Californian firm and keep CaLPERS money in-state? I can understand the later address in La Jolla as a quick view on a Google satellite map shows Everyone Counts Inc. just across the road. As to why that Doug Hoffner should be getting a what, 66% pay raise for services rendered seems strange too. His bio at https://www.calpers.ca.gov/page/about/organization/executive-officers/douglas-hoffner does not indicate much in the way of a technology background and this whole episode is not exactly something that you would like making it to your resume either. This whole story has lawsuit futures written all over it. Maybe some people there should be thinking about preparing their testimony here.

    Reply
    1. Yves Smith Post author

      Thanks for asking! I didn’t want to make this long-ish post even longer by explaining why CalPERS was so keen to implement Internet voting when voting and computer security experts are almost to a person opposed to it.

      From one of the January 14 posts on Votem:

      CalPERS changed its election procedures in 2016 and they were effective for the 2017 board elections, in which two seats were contested (both “all member” seats). CalPERS made the following major changes:

      Going from a secret paper mail-in ballot to non-secret paper ballots

      Implementing voting by phone and voting by Internet. CalPERS implemented both methods even though both are explicitly illegal for California elections, per the California Election Code § 19205. CalPERS has argued that it can set its own election methods and ignore the California election code.

      CalPERS staff claimed that the reason for the changes were to increase participation, which has always been very low, and to reduce cost. However, there were other motives at work.

      Until the 1994 board election, the unions were able to exercise a great deal of influence over the vote. Ballots were distributed at work, either by the shop steward or with the steward close on the heels of the responsible party, telling voters who they should pick..

      A court ruling invalidated this procedure and forced CalPERS to implement mail-in ballots.

      So the union push for electronic and online ballots was significant. CalPERS acknowledged the role of the unions in getting the changes approved. From the August 16, 2016 Finance and Administration Committee:

      Operations Support Services Division Chief Kim Malm: At this time, I’d like to take a minute of personal privilege, Mr. Chair. I’d like to thank the staff that have worked really hard on this over the last couple of years. Anthony Martin, Christina Nutley, Nina Dinsdale, and Dallas Stone from my staff. Also Erin Lopez and Renee Salazar from the Legal Office, and also Public Affairs. We would not have been able to do this without them, in addition to the constituents that have been extremely supportive over the last couple of years. And especially Dave Lowe and Terry Brennand who kind of got this in front of some people – important people to help us push this forward.

      Dave Low and Terry Brennand are the two big union power brokers at CalPERS. Until recently, Low was the Executive Director and chief lobbyist of the California School Employees Association. Brennand is the Director of Revenue, Budget, and Pensions, SEIU California. Why, pray tell, are the unions meddling in how CalPERS conducts its elections?

      As we’ve seen, the unions hoped to be able to exercise more influence over member votes. One way was for union members to call voters and offer to punch them through to the call-in number and help them navigate the phone prompts.1 The unions asked for a special dial in number, raising the concern that people who used that number would face fewer delays than voters who used the regular number.2

      Another way was to push members to vote, using their phones or iPad, at union meetings while the elections were open.3

      But the biggest mechanism would be vote suppression. As we wrote earlier this year:

      CalPERS’ CEO Marcie Frost has said she wants to eliminate paper balloting entirely. The justification, that this would save costs, is a convenient cover for the real aim, that of suppressing votes by retirees, who have a higher level of election participation, and have also been strong supporter of board members who have the temerity to ask questions and demand accountability, like Margaret Brown and former board member JJ Jelincic. In other words, even before you get to the opportunity to engage in nefarious conduct, the motive is to give the unions even more sway over the board.

      Back to the current comment. CalPERS did restore secret paper ballots for the 2018 election after this site and others made a stink about how they violated the California constitutional requirement “Voting shall be secret.” But CalPERS kept the Internet and phone voting regulations in place.

      Reply
      1. vlade

        Behaviour like this is what gives the right ammunition to go after unions (and public pensions). It’s IMO THE reason why people should watch these institutions like hawks, as it’s way too easy to lose them.

        When you started to run the CalPERS stories, I was upset, and angry. Now I’m just really sad (and cynical) – it’s like watching a plane crash, and wondering whether just kills the passengers, or going to hit something before that and cause collateral damage much higher than “just” the plane.

        Reply
        1. susan the Other

          going from angry to cynical is a survival technique; understand what’s coming and look for the fire escape, no?

          Reply
  3. PlutoniumKun

    Despite having zero past interest in Californian pension policy or any related subject I’ve been following Yves’ articles with fascination – as much for what it says about modern organisational rot as it does about the specifics of CalPERS. I’ve been wondering what is really behind it – and for a long time I felt this was an example of incompetent out-of-their-depth people surrounding themselves with even stupider people to make themselves feel better about themselves and to keep their pay checks rolling. Maybe because my instinct is always to favour incompetence theories over conspiracy theories.

    But when you look at how they are very obviously trying to manipulate voting systems – this is more than just stupid people trying to cover their tracks. This is straightforward corruption.

    And to add another point – the failure of the Californian media to be all over this is truly shameful. As someone commented yesterday, it really is Chinatown, Jake.

    Reply
  4. Clive

    Dear Marcie

    I don’t often accept charity cases, of which you’re undoubtedly one, for a variety of reasons such as limited amounts of time, the difficulty in assessing the worthiness of the cause and the fact that it’s unpaid work and I’ve got bills to pay. Post-Brexit, I might have to sell my entire collection of Princess Diana china collectibles just to buy an avocado. So I’m not exactly awash with altruism nowadays.

    But these are desperate times for CalPERS and desperate times call for desperate measures so I’m prepared to make an exception here. In the circumstances I’m sure you’ll understand it lacks my usual polish and window dressing. You’re getting the benefit of my immense experience and skills for free, so beggars can’t be choosers. So, that being understood, let’s kick off.

    As you obviously flunked business management school as well as the creative writing one you enrolled for but never went to (at least you didn’t put that on your made-up resume and maybe Evergreen State College didn’t run business classes anyhow) let’s start with some Janet and John beginners’ level stuff…

    Within any organisation over and above a very small or medium sized enterprise you have an organisational function called “Purchasing”. Let me spell that for you: p-u-r-c-h-a-s-i-n-g. Now, on hearing the word you might think it’s all about buying shoes or something. Ah-ha! Not so. That’s a beginner’s mistake (or a “rookie error” as I think you say there). No, purchasing in this situation is where the organisation buys in goods or services as an organisation. Yes, it is a bit complicated, if you’re not too bright, but please try to stay with me here.

    So if you’re the CEO (no, I can’t believe it either, but here we are anyhow) you need to have a Purchasing Department. That’s a group of employees who know how to buy things properly. There are, I regret to say, a lot of people out there who are con artists and don’t do the things they say they do. But I hardly need to tell you about that, do I! Your Purchasing team will try to spot these ne’er-do-wells before you get involved with them or give them any of California’s pension contribution payers’ hard-earned money.

    Want to know more? I suspected you would! Allow me to let you into a little secret. All you really need to know is here https://en.m.wikipedia.org/wiki/Purchasing It’s quite comprehensive and it is written for the laity (it is hard to resist here quipping “that’s no laity, that’s the CEO of CalPERS”, but I will try). Another shocking revelation — yes, you do wonder what the world is coming to — is that there’s also a lot of people who go around saying they are consultants or giving themselves other fancy titles but all they do is copy and paste stuff off of Wikipedia and put it into PowerPoint. Can you believe it? There is no way I, for example, would ever resort to just ripping off that Wikipedia page, wrap it up in a 10 slide presentation and charge someone £1,000/day for doing it. Well, if I did resort to doing it, and I’m not saying I ever would or ever did, I’d be thoroughly ashamed of myself and resolve to mending my wicked ways.

    Anyhow, hope that helps. Sorry for the brevity but with a bit of luck I’ve given you enough to get you started there. Got to dash, it’s coffee time and I know you’re busy too, with, erm, whatever it is you do there.

    All the best, do drop in if you’re passing.

    Clive

    Reply
  5. EoH

    For an organization with the resources and residual goodwill of CalPERS, this continued gross mismanagement is stunning. When you pile one episode on another, it seems as if Ms. Frost and Mr. Jacobs – who would be approving these contracts, or intentionally allowing them not to be put in place, as well as making representations to the board about them – are anxious to spend a few well-deserved years in prison.

    Reply
  6. Tom Stone

    If anyone is wondering where AG Becerra is, well, he’s been busy filing lawsuits against the Trump administration.
    46 of them so far.

    Reply
    1. UserFriendly

      What I’m wondering is why you are so sure that AG Becerra is even aware of calpers malfeasance. Just about every Calpers story you chime in that he is gonna lay the smack down. What gives?

      Reply
  7. audrey jr

    As a native Californian who has paid taxes in this state for over 40 years I am aghast at the state of CalPERS “governing board” and their choices.
    I had little hope of any concrete action(s) being taken by former Governor Moonbeam but I did think that there was some hope under Gavin Newsome.
    He needs to step up to protect, where it is possible, the public employees pension plan for the large numbers of hardworking state employees and their dependents.
    Yves has done an absolutely stellar job of staying on top of what is turning into a real family blog show in Sacramento.
    When will these idiots finally purge themselves and our state pension fund of the noxious and odious presence of Marcie Frost?
    What does Frost have on these folk that she is using to keep her position? Or is everyone over at CalPERS in on the scam?

    Reply
  8. David in Santa Cruz

    Is there is a reason that California’s Clintonite AG, who was only a licensed attorney from 1985-1991 and then was placed on “inactive” status as a lawyer for sixteen years, is looking the other way while the state’s $360 Billion pension system is run like Venezuela or Azerbaijan? Do the Private Equity and Real Estate General Partners deploying CalPERS’s investments make generous political contributions and decide whether private sector union contracts live or die? Look it up. The FPPC and Transparent California publish online reports where you’ll see some of the same names over and over.

    Follow the money.

    Reply
      1. David in Santa Cruz

        Vice-Chair of the Democratic Caucus in the US Congress, although never introduced any legislation of note. AG job appears to have been consolation prize for lost opportunity to serve in HRC’s cabinet. Was on the Clinton VP shortlist and a big fund-raiser/bundler.

        Reply
    1. Anon

      Talking about California’s current AG prompted me to think about California’s previous AG, Kamala Harris. What has her role been in CalPERS ongoing incompetence saga?

      I seem to remember that she sidelined JJ Jelencic on hiring issues as AG. The board hired Ted Eliopoulos as CIO despite JJ’s objections on his lack of fitness for the role. Eliopoulos is now raking in the big bucks at Morgan Stanley.

      I think there’s a story here about CalPERS and Harris’ role when she was AG that needs greater scrutiny. If only we had a real media…..

      Reply
  9. EoH

    Interesting factoid: CalPERS in 2016 appears to have owned up to a third of AMI, parent company of the National Enquirer, “one of President Trump’s most controversial allies….[t]hrough an investment managed by a New Jersey hedge fund.”

    https://www.latimes.com/nation/la-na-national-enquirer-20190221-story.html

    Maybe now Trump will allow California to keep its federal forest management grants after all. Or not.

    Perhaps Ms. Frost can explain how having less information about and control over the vehicles its PE group invests in in any fashion meets its financial and non-financial obligations to the people of the State of California.

    A representative of a New Jersey state pension fund which also found itself an investor in AMI said, with more candor that one might expect from Ms. Frost, “If it gets to the point where it gives us a black eye … we’ll have to take the hit and get out.”

    Reply
  10. Pete in Toronto

    Yves,

    You quoted The Block: “Last week the company [Votem] ran into short-term liquidity issues resulting in restructuring and recapitalization of the company, which included layoffs.”

    Maybe one of the non-transparent, private-equity investors is… CalPERS!

    ;)

    Reply

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