CalPERS’ Chief Investment Officer Ben Meng has filed demonstrably false financial disclosure documents, flouting the requirements of the California Fair Political Practices Commission. As a result, not only has Meng committed perjury, but CalPERS’ failure to review or require Meng to correct these documents points to a major compliance failure, since CalPERS has, or should have, records that would show that Meng’s financial disclosures were incomplete.1 Recall that this lapse follows CalPERS having had a huge spike in personal trading violations, which it has yet to explain adequately, let alone describe what it will do to prevent abuses like that from recurring. Poor controls are a disaster in the making for a financial institution, as the Wells Fargo fake account train wreck illustrates.
To make this sorry situation worse, CalPERS delayed releasing the Forms 700s until it became clear they’d be published regardless, suggesting that they were fully aware of this and potentially other lapses, yet refused to correct them.2
As we will also discuss, even the properly completed sections of Meng’s forms raise concerns, since they show that he has financial conflicts of interest with respect to private equity and has had an appetite for highly speculative instruments. The latter worrisomely may explain Meng’s appetite for risk now. Readers may recall that CalPERS has announced, with great fanfare, its plan to meet its 7% return target. It amounts to putting the available casino chips on the “more risk” numbers and then borrowing from the house to buy more chips to increase the size of the wager.3
Finally, this abuse by CalPERS top investment executive occurred just as CalPERS has been successfully moving forward legislation, AB 2473, to have its private debt investments, an area it intends to expand, exempt from Public Records Act disclosure. That means Meng could approve private debt deals that would benefit him or other CalPERS executives and the public would have no way of knowing. This bill has not yet gotten all the way through the legislature, so it is still possible it could be held back for badly-needed further review.
Background: The Importance and Legal Status of the Financial Disclosure Form 700
Under Marcie Frost, CalPERS consistently failed to comply with its own transparency policy, which is to publish promptly all of the the personal financial disclosure forms known as Form 700 filed by board members and executives annually with the Fair Political Practices Commission. Form 700s are required of all public officials to show investments in their jurisdiction so as to present potential conflicts of interest.
These are public records whether or not CalPERS posts them on its website as required by its own policy. The fact that CalPERS started foot dragging, posting them only after getting complaints, is a departure from its practice under previous CEOs. Needless to say, it creates the appearance that CalPERS was hiding something, meaning trying to protect an executive or board member.
That concern looks to be well founded. After getting inquiries as well as a Public Records Act request from your humble blogger, CalPERS eventually put the 2019 Forms 700 on its site. As we will explain, the Forms 700 by Chief Investment Officer Ben Meng as of when he assumed office and for the full year 2019 taken together show that Meng has made many false statements. This means he has engaged in a felony. As you can see on first page of the Form 700, the respondent avows (emphasis original):
I have used all reasonable diligence in preparing this statement. I have reviewed this statement and to the best of my knowledge the information contained herein and in any attached schedules is true and complete.
I acknowledge this is a public document. I certify under penalty of perjury under the laws of the State of California that the foregoing is true and correct.
Perjury is a felony in California. And Meng has no excuse that he does know how to fill out this document. First, he was a Form 700 filer during his previous stint at CalPERS. Second, CalPERS staff sends multiple e-mails to Form 700 filers offering to help if they have any questions.
This false declaration does not merely reflect poorly on Meng’s integrity and competence. The forms also show that Meng has investments in private equity funds Ares (one of the five involved in the Fred Buenrostro bribery scandal), Blackstone, and Carlyle. As we will document shortly, CalPERS has made significant investments in Blackstone and Carlyle funds, raising the question of whether Meng recused himself (we have put in a Public Records Act request that should provide an answer) But first, let us explain why Meng’s forms are false declarations.
Meng’s Felonious Forms
We have embedded Meng’s Form 700 filings at the end of this post. Note that the first one, dated January 31 2019, is as of Meng assuming office on January 2, 2019. This document is meant to show all relevant financial holdings on that date; the filers is not required to provide any history of his investments. You will see filers are not required to provide the exact dollar amounts of their positions, merely the size category each falls in.
The annual form requires more information. Filers are required to list the name of any assets they held during the year if the position is worth more than $2000 at any point in the year, not just at year end. If they disposed of an asset, they must list the date of sale. If they bought and sold an asset during the the year, they are required to list that and provide the date of purchase and/or sale.
If you compare the two forms, you can see on Meng’s initial Form 700, under Schedule A-1, which is “Stocks, Bonds, and Other Investments” Meng lists 46 holdings as of January 2, 2019. His form for the full year shows only 22 holdings. As we show below, Meng disposed of at least 23 positions without providing the date of sale as required.
And Meng can’t pretend that he didn’t understand that he was to list any security he held during the year and provide the sale date, since he did so with one investment:4
Note also that Meng more often than not refers to the same investment differently across the two forms, impeding comparison. For instance, Ares Capital is “ARCC CAPITAL CORP. (ARCC)” in Meng’s initial filing and “Ares Capital Corp” in his 2019 annual filing; “Open Joint Stock Company Gazprom (OGZPY)” in the initial filing becomes “PJSC Gazprom” in the annual. And Meng did not use ticker symbols consistently even in his initial filing, witness “Johnson & Johnson” in Meng’s initial filing.
Meng also has two entries for GLD in his initial filing, one as “SPDR GOLD SHARES (GLD),” at the top of page 7 of the pdf, and “SPDR GOLD TR GOLD SHS (GLD)” at the bottom of page 8. Are these listed separately, with different names despite the same ticker because they are held at different brokerage firms? If so, does CalPERS have access to both sets of records? And do these apparently separate holdings add up to more than $100,000, which would have required them to show that higher total? As you will see in the tally below, this is not Meng’s only duplicate item.
Anyone in finance will tell you that this level of sloppiness is troubling. An error as minor as the omission of a period in the name of a secured loan in a contract can vitiate the security interest in that loan.5 More generally, financial services professionals fetishize the consistent use of legal names (or defined terms as substitutes) for among other reasons, accurate entry in databases to prevent back office errors, particularly in trades.6
Here are the names of the securities in Meng’s initial filing that are missing in his 2019 annual filing. If you take the trouble to go through them, some of the initial filing names were two different securities name variants but with the same ticker symbol. The difference in names suggests Meng held the same security when he joined in two different accounts. This raises the question as to whether he failed to aggregate the total, creating a misleading impression (i.e., that he owned less than $100,000 in GLD when he in fact held more). In all cases where Meng showed two holdings of the same security at the start of 2019, he had either apparently sold it or corrected his reporting to show it as a single position in his full year 2019 filing.
Here are the securities that were on Meng’s start of 2019 report that disappeared entirely from his account for the full year:
Agriculture Bank of China (ACGBY)
Alcatel Lucent Sponsored Adr.
Cesca Therapeutics Inc.
China Construction Bank (CICHY)
CMS Energy Corp (CMS)
Fidelity California Municipal Fund (FCFXX)
Fidelity Cash Reserves (FDRXX)
General Electric Company (GE)
Industrial & Comm. Bank of China Ltd. (IDCBY)
IPATH SP 500 VIX SHORT TERM (vxx)
ISHARE TRUST MSCI EMERGING MARKETS FUND (EEM) (listed twice)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI Europe Financials ETF (EUFN)
iShares Select Dividend (DVY)
PDR INDEX SHS FDS EURO STOXX 50 ETF (FEZ) (listed twice)
ProShares UltraShort Barclays 20+ Yr Treasury (TBT)
SPDR EURO STOXX 50 ETF (FEZ)
SPDR GOLD TR GOLD SHS (GLD)7
SPDR S&P Homebuilders (XHB)
Vicor Technologies, Inc.
So 23 positions listed on Meng’s initial Form 700, 21 representing separate securities, 2 as either a duplicate listing or a separate position in the same instrument, vanished when their disposition was required by law to have been accounted.8
Here are the companies with two entries with the same ticker, which appeared as only one (yet again different) name for the full year 2019. We show the ticker when listed and then the name presented in the full year 2019 report:
(CMAKY) China Mingsheng Bank
(SNP) China Petroleum & Chemical Corp
(FXI) iShares China Large-Cap ETF
And some telling details: Meng’s initial Form 700 shows two highly speculative, as in day-trader-level speculative positions: the ProShares UltraShort Barclays 20+ Yr Treasury (TBT) and IPATH SP 500 VIX SHORT TERM (vxx). Both securities get the equivalent of investor black box warning. As this video explains, a levered ETF is suitable only for intra-day trading due to its high level of volatility drag. See here for another discussion. In keeping, the Barclays description of the instrument flag that the 2x feature only works for a single day:
ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks.
The VIX ETF also has volatility drag, albeit not as severe. The point is that these instruments make sense only in very limited circumstances, and tend to be used/overused by individuals who love trading action. Their inclusion in Meng’s portfolio are deeply troubling signs that of an appetite for risk for adrenaline’s sake.
Meng’s Private Equity Conflict of Interest
Meng holds positions in three private equity fund managers: Ares, Blackstone, and Carlyle, despite or maybe because the industry has continued to extract high fees even as net results to investors like CalPERS continues to fall. CalPERS lost 5.1% in private equity last year, worse than the SP 500 and worse than CalPERS’ own public equity portfolio. No less than the Financial Times has decried the industry’s fee grifting as “the real ‘Money Heist'”.
These investments create a general conflict of interest against Meng building up capabilities in house to make private equity investments in house to cut out fees and costs that CalPERS has estimated at 7% per year. That is the course of action recommended by CalPERS’ own private equity expert, Dr. Ashby Monk, as well as others.
But if CalPERS were to announce such a move, it would have as dramatic an impact as former CIO Ted Eliopoulos’ 2014 decision to get CalPERS out of hedge funds. This legitimated and accelerated an exit that was already under way.
In other words, Meng has put himself in and continues to remain in a position where doing the right thing by beneficiaries would hurt his personal balance sheet.
CalPERS has also made large commitments to Blackstone and Carlyle funds since Meng became Chief Investment Officer. We have put in a Public Records Act request to obtain records of Meng’s recusals. Since recusals have to be documented to have legal force, failure of or refusal by CalPERS to provide evidence that Meng had recused himself would be compelling evidence that Meng had failed to do so.
Recall that Meng joined at the start of January 2019. See this entry from CalPERS’ Private Equity Program Fund Performance Review:
The relevant columns are the two just to the right of the name. 2019 is the “vintage year” meaning when fund closed. $328,239,616 is the size of CalPERS’ commitment.
CalPERS under Meng also committed $1 billion to Blackstone this year, as you can see on page 2 of this June 2020 presentation for the quarter ended March 31, 2020:
CalPERS “Trust Us” Private Debt Bill
CalPERS is sponsoring Assembly Bill 2473 (Cooper), changing current law to exempt “Private Loans” made by a “Public Investment Fund” from the California Public Records Act (CPRA). The bill is currently before the Senate Committee on Labor, Public Employment, and Retirement. These “Private Loans” are a new and untested investment strategy which has not been commonly used for the investment of money held in trust to fund public pension obligations. These loans only have the potential to yield high interest if they are made to borrowers with a high risk of default — or even bankruptcy.
This bill was pitched by CalPERS staff as the only way that they can hit their 7-percent return target, but it contains sweeping secrecy provisions far beyond what might be seen as necessary to negotiate “Private Loan” deals. People are starting to wake-up and smell the coffee about CalPERS placing assets at risk by using leverage to engage in speculation.
Pasadena City Manager Steve Mermell recently told Pasadena Now that he and the Pasadena City Council are opposed to the strategy now that they’ve seen the details:
I am concerned that in its efforts to achieve greater returns, CalPERS is taking on additional risk, by shifting more investments to private equity and more alarmingly, borrowing money to invest,” Mermell told Pasadena Now. “While the strategy may get results, just like gambling, the downside risks are too great and it’s the taxpayer that will end up footing the bill.
Assemblymember Marc Levine (D-Marin) cast the sole vote opposing AB 2473. Assemblymember Levine went on the record with Ben Christoper of CalMatters, frankly stating:
It’s hypocritical for Democrats in the Legislature to allow CalPERS to hide the critical information about investments and investors while seeking disclosure from the president on his investments. Can you look more dopey than that?
History also shows that these officials are right to be worried. CalPERS has pitched its bill as necessary for it to be able to get into banking. In the early 20th century, most states set up private banks for similar purposes. They all turned into cesspools of corruption. The only one that remains, North Dakota’s private bank, is not a direct lender but a banker’s bank, buying participations of in-state loans that it deems prudent.
Finally, it’s cheeky for CalPERS to act as if it needs extra protection from Public Records Act inquires when it already routinely flouts the law. For instance, CalPERS has refused to provide copies of the resignation letters of recent high-level departures that are widely believed to have been forced out: Elisabeth Bourqui, Ron Legnado, and Paul Mouchakka. The First Amendment Coalition explains how case law makes these missives public records save for very limited, truly personal information, which would in most cases at most require that part of the letter be redacted. CalPERS has also refuse to let board members see these letters. So what is Marcie Frost trying to hide?
Speaking of Marcie Frost, who is responsible for this abject compliance failure? Narrowly, it is Frost. As the CEO, all CalPERS bucks stop at her desk, including whether to keep Meng on as Chief Investment Officer.
Specifically, Marlene Timberlake D’Adamo is the Chief Compliance Officer. Timberlake reports to Frost. Timberlake oversees Personal Trading Policy. Compliance has (or should have) records that showed incompleteness of Meng Form 700; if Compliance have those records, that’s a red alarm event.
But the Board clearly can’t be bothered with compliance or even basic honesty. Longstanding former Board President Rob Feckner, who is still wields disproportionate influence, and his successor, Priya Mathur, both backed the former CEO, now imprisoned felon Fred Buenrostro, up to the end. And neither attempted to explain or apologize for the damage done by their dogged defense. Mathur supported Frost when she held onto flagrant resume fabricator and perjurer Charles Asubonten.
This board has gone even further into dereliction of duty by delegating more investment authority to staff, with no checks and balances, when under the law, the board cannot delegate its responsibility. In particular, Lisa Middleton campaigned for the board even though its schedule conflicted with her board schedule at the Palm Springs city council, so she personally pressed for even less oversight in the form of shorter and less frequent board meetings, with CalPERS staff presenting a schedule that obligingly opened up her conflicted days. Since when is a self-created scheduling conflict more important than protecting CalPERS beneficiaries and taxpayers? Only when it allows CalPERS staff to evade supervision and a capture a board member.
In keeping, Middleton, who is the co-chair of Risk and Audit, even voted against discussing CalPERS audits in closed session. Middleton is so any anti-transparency she does not want the board to discuss CalPERS’ internal audits! No other public agency in the state treat every internal audit as confidential.
But Lisa Middleton is merely General Counsel Matt Jacobs’ cat’s paw. It is Matt Jacobs who has decided that he is in the business of protecting CalPERS executives and board members from embarrassment and accountability, as opposed to executing his sworn duties and protecting beneficiaries and taxpayers.
One of Jacobs’ pet practices it to treat every internal CalPERS document as “attorney client privileged” when dragging a member of the legal department into a discussion does not confer privilege. There are boatloads of precedent showing that privilege exists only when a lawyer is providing legal advice, not when participating in discussions of mere political and business matters. Oh, and when this bad practice become institutionalized? When former CEO Anne Stausboll, herself an attorney and hence knew when Jacobs was way out on a limb legally, retired and was replaced by high school graduate Marcie Frost.9
CalPERS board and executives apparently lack the survival instincts to recognize that they can’t escape accountability for much longer. When Meng’s risky gambles fail to work out, they will be the ones holding the bag. The stunning spectacle of Kentucky’s Republican attorney general Daniel Cameron suing Henry Kravis and Steve Schwarzman, two of the biggest Republican party funders, personally, along with their firms. shows that governments left holding public pension fund empty bags can and will turn on responsible parties. It won’t be long before deeply-in-the-pension-hole states like Illinois and New Jersey start looking hard at suing pension boards and officers, both to collect on their D&O policies and to pressure them to get at misbehaving big fee fund managers on behalf of taxpayers.
Oh, and as we’ve pointed out, the CalPERS D&O policies for board members are legally unenforceable. For board members who aren’t judgement proof to continue to act like potted plants is tantamount to buying personal bankruptcy futures. Not that they don’t deserve it.
1 The Forms 700 are filed with CalPERS, which keeps a copy and forwards the original to the Fair Political Practices Commission.
2 Meng could easily have filed an amended form.
3 This is not an exaggeration, as we explained in detail here: CalPERS Plans to Blow Its Brains Out: Seeks to Increase Risk by Boosting Private Equity, Private Debt, and Leveraging the Entire Fund. CalPERS plans to leverage its entire portfolio and invest more in private equity and add investments in private debt. CalPERS has given inconsistent answers as to how the borrowed funds will be deployed, but it has given the impression that they will go disproportionately to private equity and private debt. Note that other major investors, like German pension funds, use portfolio-level leverage to compensate for not investing in private equity, as to create a higher overall risk level than they can achieve with public securities, and not in addition to private equity and debt investments.
4 The observant may have noticed that Meng’s initial form, as of when he assumed office, did not have the “ACQUIRED” or “DISPOSED” items with the year filled in, while his annual form for 2019 did. That is how the Fair Political Practices blank form reads, with the year supplied, presumably as a reminder that activity prior to the current year does not need to be reported.
5 Not making this up. My lawyer saw this happen in a case by one of her partners. The name in the contract was not the same as the name as in the UCC filings, and the difference really was all of a period. It still meant the parties to the contract were unable to go after the collateral.
6 Treating CalPERS as having financial professionals in its ranks regularly looks like a fact not in evidence.
7 If we are to accept Meng’s filings on their face, as noted above, he had two separate holdings of GLD and disposed of one. Clearly other facts might hold.
8 It is in theory possible that all of these holdings fell so far in value that they were below the $2,000 minimum reporting threshold. Needless to say, that would not speak well of Meng’s investment acumen.
9 There are many accomplished individuals who have graduated only from high school but have sought actively to acquire knowledge and/or technical skills on their own. Frost is not one of them.00 Ben Meng Form 700 as of Assuming Office
00 Ben Meng Form 700 Annual for Calendar 2019