Another Compliance Failure: CalPERS Discussed Recusal of Ex-CIO Ben Meng but Failed To Enforce It; CEO Marcie Frost Says “Not My Job”

As we have pointed out, on January 31, 2019, when new Chief Investment Officer Ben Meng submitted his “Assuming Office” financial disclosure form (Form 700), CalPERS was put on notice that Meng had a serious conflict of interest It’s possible that CalPERS did not bother to look at the filing but that would suggest even more compliance problems.

That document showed Meng held shares in Blackstone and Carlyle along with an Ares credit fund. Given that CalPERS was and is doggedly committed to private equity, had invested in Blackstone and Carlyle funds, and was sure to be solicited by those fund managers, there was no way Meng would not wind up considering investments that would benefit him personally.

A new document shows that when CalPERS finally woke up to Meng’s conflict of interest problem, in April 2020, it discussed the most obvious remedy, of having Meng recuse himself, yet failed to require him to do so. And as we also know, CalPERS failed to take the other step to solve Meng’s problem: having him divest his private equity holdings.1

At the end of this post, we have embedded CalPERS’ response to a Public Records Act request about Meng’s recusals. I e-mailed Deputy Executive Officer Brad Pacheco on August 27 (emphasis original):

Dear Mr. Pacheco,

I trust you recognize the admission CalPERS made in this PRA response, which I attach for your convenience.

1. That you do have records that contain discussions of Ben Meng recusal(s), but are asserting that they are exempt as relating to alternative investments, which CalPERS voided by its communications to the press: GC 6254.26 “…unless the information has already been publicly released by the keeper of the information.” For instance, per Bloomberg on August 8:

“…When, in April, a compliance team uncovered at least one conflict-of-interest violation, it set in motion a chain of events that threatened to spark a firestorm of criticism and thrust him into the center of even more hostility. …Frost believed the violation was an unintentional error, the sloppy result of Meng’s focus on improving returns, according to a person familiar with her deliberations and discussions. But she planned to discipline him — either by cutting his incentive pay or possibly by placing a formal letter into his file.”

2. That Ben Meng did not recuse himself despite the discussions in #1 since any recusal would have to be public to have legal effect per GC 87105:

§ 87105 Manner of Disqualification.
“(a) A public official who holds an office specified in Section 87200 who has a financial interest in a decision within the meaning of Section 87100 shall, upon identifying a conflict of interest or a potential conflict of interest and immediately prior to the consideration of the matter, do all of the following:
“(1) Publicly identify the financial interest that gives rise to the conflict of interest or potential conflict of interest in detail sufficient to be understood by the public, except that disclosure of the exact street address of a residence is not required.
“(2) Recuse himself or herself from discussing and vot- ing on the matter, or otherwise acting in violation of Section 87100.
“(3) Leave the room until after the discussion, vote, and any other disposition of the matter is concluded, unless the matter has been placed on the portion of the agenda reserved for uncontested matters.
“(4) Notwithstanding paragraph (3), a public official de- scribed in subdivision (a) may speak on the issue during the time that the general public speaks on the issue.
“(b) This section does not apply to Members of the Legislature.”

Does CalPERS really want to take the position that it discussed the idea of having Meng recuse himself but failed to do so, since any recusal has to be public to be valid under the law, and therefore would also have to be provided in response to a PRA request?

I trust you will reconsider your determination and provide the records requested as a result of the status of the information sought in light of #1 and #2.


Mr. Pacheco did not respond. The Latin maxim, which also has a following in legal circles, is “Qui tacet consentit,” or “Silence gives consent.”

It appears that CalPERS’ desire to avoid embarrassment by hiding legal violations, as well as an unwillingness to make Meng follow conflict of interest rules that he should have been familiar with as a result of his earlier stint at CalPERS, in the end blew Meng and CalPERS up.

Recall that the press has already reported that CEO Marcie Frost planned to bury the matter and just give Meng a slap on the wrist. From Bloomberg on August 8:

But she [Frost} planned to discipline him — either by cutting his incentive pay or possibly by placing a formal letter into his file.

Institutional Investor confirmed that Meng also believed that his case had been settled before the press uproar…and recall again that since the board had not been informed, it almost certainly implies that the plan was to bury the problem. From Institutional Investor:

It was actually in April that the disclosure issues first came to light internally at CalPERS, when a compliance team flagged a violation: a $70,000 investment in shares of Blackstone Group, which Meng owned at the same time the pension fund made new investments in the firm, according to a Bloomberg report. A former colleague of Meng’s tells Institutional Investor that the then-CIO told this person at the time that an internal investigation had been done and that the issue was resolved.

CalPERS contacts have told us that Meng had hired an attorney, which means the lawyer and Meng would have received the findings of this “internal investigation” and perhaps supporting information. Has the staff yet given any of the investigation documents to the board? If not, that’s a scandal in and of itself. And if so, one test of how forthcoming staff has been is whether they told the board of their recusal discussions and why Frost didn’t insist that Meng go that route.

And Frost kept the board in the dark, as one could easily have inferred from Controller Betty Yee’s demand for an emergency board meeting. In fact, Frost confirmed the story we broke last week, of her impermissible “board within the board” regular sessions with Board President Henry Jones, Investment Committee Chair Theresa Taylor, and Performance, Compensation & Talent Management Chair Rob Feckner. The only authorized communication chain, both under the Bagley Keene Open Meeting Act and under CalPERS policies, is either Frost to the Board President, who has an obligation to convey urgent matters to the board, including scheduling an emergency session, or to relevant committees of the Board at their regular meetings.

Instead, Frost acted as if it’s perfectly fine for her and Three Stooges to give the rest of the board the mushroom treatment. From Bloomberg last week:

Regarding internal investigations, Frost said that as her “best practice” she notifies the board president and the chairs of affected committees, adding that she did so in Meng’s case.

This is blatantly false. Frost’s conduct is inconsistent with any delegation of authority or board policy.

And Frost trying to cover for it by inventing her personal extra special made up “best practices” confirms that she is incompetent, delusional, or both. As anyone who has done time in a big organization knows, “best practices” are one of the end products of benchmarking exercises. Does Frost seriously think anyone will buy her effort to claim that CalPERS benchmarked a model universe on board communications regarding an internal investigation, and that even if such a study implausibly existed, that it gives her the authority to negate board communication processes that are clearly defined in formal written policies? Or is Frost now so cornered that she’s seeing if she can carry off even bigger lies than ever as her way out?

So not only has staff successfully schemed over the years for the board to cede power, but Frost feels she has license to do as she damned well pleases regardless of the structures that still remain.

But the piece de resistance came in Pensions & Investments, when Frost flat out said she’s not doing the CEO job:

It is important to guard against the appearance of impropriety, Ms. Frost said. Currently, it is up to each investment staff member to ensure there are no conflict of interests between their personal investments and their job at CalPERS, she said.

CalPERS main role is education, Ms. Frost said, noting that each staff member has a “personal responsibility” to ensure they recuse themselves from participating in activities in which they have a conflict.

Frost should be fired for that statement. No financial institution can afford to have its top executive say that it’s not in the compliance business, that everyone is expected to know how to behave and allowed to operate willy-nilly

She is also clearly being insubordinate by refusing to perform her official duties. From the CalPERS Delegation Resolution for the Chief Executive Officer:

Despite her affirmation above, Frost has apparently forgotten that CalPERS has a compliance function, called Enterprise Compliance or ECOM in CalPERS-speak, although since she’s kept its staffing at a mere 21, versus, depending on how you count it, 79 or 81 for her PR department,2 it’s apparent what matters to her.

And Frost also appears to have forgotten that the top initiative of the compliance function that she lost track of was improving its oversight of conflict of interest rules:

On top of that, even if Frost were correct that her job consisted not of being the CEO and ensuring the integrity of operation, but a mere trainer, even second-grade teachers take education far more seriously than Frost does. They don’t see themselves as mere script-mouthers but hold themselves and often are held responsible for the degree to which their students acquire information and skills.

But we already know that Frost has no respect for education either. Otherwise she never would have tried to carry off that she’d enrolled in a non-existent bachelor’s/master’s degree program when she’d never even matriculated in any higher education program.

Frost has just stated she refuses to fulfill the duties of CalPERS CEO. I hope the board acts accordingly, reassigns her to be head of Communications & Stakeholder Relations, which seems to match her skill set (with enough help from Randle Communications), and find someone who is willing and able to oversee CalPERS.


1 This would not serve to undo the conflicted actions Meng had already taken: that of committing to a $1 billion Blackstone fund as well having a Carlyle deal in the pipeline. But owning up to the problem and saying that CalPERS had taken corrective steps, albeit late, was the prudent and proper thing to have done.

2 79 authorized for the fiscal year 20-21 budget, v. 81 on the current department e-mail list.

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  1. Fiery Hunt

    I give Frost a week before “more time with my family ” leave happens.

    I hope Yee is reading these devastating indictments.

    1. vlade

      I’d really like you to be right, but so far it seemed her middle name was “Teflon”. That will hopefully change with Yee getting involved, but I’ll celebrate only when she’s gone.

  2. John Zelnicker

    It really amazes me how much the s-pile gets deeper and wider with each revelation.

    At this point, I’m beginning to think that Marcie is incapable of critical thinking, which a college education might have taught her. How can she not understand the implications and consequences of the positions she’s taking? Did she not read the portion of the Employee Manual that applies to her? Did she not educate herself on the obligations and responsibilities of the CEO of CalPERS?

    Apparently not.

    1. PlutoniumKun

      Yes, this is a surprise. I’ve come across Marcies/Mengs before in my career and usually they have the cunning to at least cover their tracks by maintaining the appearance of following correct procedures when they know their corruption or ineptness might be exposed. It appears that Marcies methodology is to surround herself with a blizzard of BS and word salads in the hope nobody notices whats going on underneath. This is, to put it mildly, a somewhat limited strategy for long term advancement, although admittedly its worked pretty well for her so far.

      1. vlade

        When I run into Marcies of this world, they were usually so enclosed in their own world that they could not even concieve anything wrong could happen – to them. And when it does, they scream about the unfairness of it all.

      2. HotFlash

        I am betting that Marcie Frost has a mentor/sponsor who is directing her. The mentor may be getting direction from someone(s) else, as well. I refernce the suggestion that the Buenostro/Villalobos scandal was the tip of an iceberg that goes deep into Sacramento, as per this comment from the other CalPERS post today.

        1. Yves Smith Post author

          No, her only mentor is Jay Inslee in Washington.

          The sad truth is Frost was apparently the best candidate that showed up for the CEO job when CalPERS conducted the search. But that was also based on the board prioritizing someone who would butter up the outside constituencies, which the former CEO Anne Stausboll didn’t do much of and labor in particular was pissed. So they got someone who does face time and not much else.

  3. rusti

    Regarding internal investigations, Frost said that as her “best practice” she notifies the board president and the chairs of affected committees, adding that she did so in Meng’s case.

    This reminds me of a scene from Office Space:

    Bob Slydell: What would you say ya do here?

    Tom Smykowski: Well look, I already told you! I deal with the goddamn customers so the engineers don’t have to! I have people skills! I am good at dealing with people! Can’t you understand that? What the hell is wrong with you people?

    Sounds like Frost has etched out a similar role to the tune of $330k+ per year. If they ever boot her out of CalPERS, she should get a job working for one of the big Department of Defense contractors.

  4. Tom Stone

    Marcie Frost was hired because of her lack of qualifications and her willingness to go along to get along, just as Attorney General Becerra was.
    This is how the business of Government is done in California.

    1. PlutoniumKun

      Given that ‘willingness to go along to get along’ pretty much defines Joe Biden career, it will soon be more than California.

    2. Bob

      CALPERS management knew about Ms Frost’s somewhat curious lack of education credentials.
      Ms. Frost uses the proven method of creating disruption and spreading BS to keep her position.
      And she is encouraged to do so.

      In the end, Ms. Frost will be tossed aside with a suitable deal which she can’t refuse. She had better lawyer up. And save every penny she can.

  5. PlutoniumKun

    although since she’s kept its staffing at a mere 21, versus, depending on how you count it, 79 or 81 for her PR department.

    Wow, that really caught my attention. 80 people in a PR department? Four times more than in compliance? That’s the sort of PR department size I’d expect for an oil company. And they have PR consultants too.

    1. vlade

      I’ll repeat what I wrote elsewhere – I don’t see a reason for Calpers to have a PR department. They don’t sell a product/service for profit.

      The comms with beneficiaries (current and future) doesn’t need PR, they need facts, not BS.

      1. Conrad

        I fear that battle was lost long ago. The bullshitters won and everywhere I turn I see legions of PR flacks ‘managing perceptions’ on much better salaries than the people who actually do whatever it is that particular organisation is supposed to be doing.

  6. flora

    And Frost kept the board in the dark, as one could easily have inferred from Controller Betty Yee’s demand for an emergency board meeting.

    For some reason, newpaper reports from the 70’s and 80’s about mid to large banks being embezzled by their inside computer programmers comes to mind. One guy was only caught because he went on a 2 week vacation and forgot to flip some switch in his code, and suddenly accounting errors started showing up while he was on vacation. After a few of these instances, banks started making their programmers go on short vacations during which time the banks would run an independent audit of code to detect illegal or suspicious fund accounting or transfers in the programs.

    That sort of thing still happened. Big case in Dubai in 2015. Not sure why Marcie at CalPERS reminds me of this. Maybe she should be sent on a 2 week vacation while an independent audit is conducted.

    Thanks for your continued reporting on CalPERS, PE, and pensions.

  7. The Rev Kev

    ‘In the dark and in the gloom they said cheer up – it could be worse. They were right. I did – and it was.’

    Actually this could get a lot worse for CalPERS. So imagine that Jones and Frost are on a conference call with Governor Gavin Newsom and Newson tells them that he has hired a consultant to go and do an analysis of CalPERS operations. He also tells them that they have his full authority to do a thorough investigation of what is going on with CalPERS and that they can go anywhere that they like. He then tells them that the consultant is due to start tomorrow after her plane lands from Alabama.

  8. flora

    ‘…CEO Marcie Frost says “Not My Job” .’

    Perhaps it soon won’t be. ;)

    Thanks for your continued reporting on CalPERS, PE, and pensions.

  9. Jennifer

    You’all must see she was not hired for her leadership skills and education, right?
    Retirees should demand the excess of consultants stop. It is all current contributors and retiree’s money. By law they all have a right to hear and know all that is going on. Mr. Meng and Ms. Frost are CEA positions.
    The unauthorized meetings of the board with just 3 members should also cause them immense consternation as well. All of the participants are “ conspirators” in this dishonest fund management and should be relieved of their duties immediately. They all know very well what they did was wrong.
    The general counsel is also at fault for facilitating all of this.

  10. David in Santa Cruz

    As was said on today’s other thread, even if Frost is fired as she so richly deserves to be, you only got the monkey, not the organ-grinder.

    It can be no coincidence that two of Frost’s “best practice” board members were on the board when Buenrostro was taking kick-backs. The third stooge was a Sacramento SEIU officer until her local got wind that she was skimming-off double-pay for activities compensated by her employer with release time — that she only recently “remembered” to amend her disclosure forms to include. They also happen to be the three board members with he most to gain from a cover-up.

    Follow the money…

  11. Dean

    Bonuses for everyone at CalPERS should be suspended this year. If you can’t meet the 7% rate of return then tax payers should not be on the hook for CEA bonuses.

  12. EoH

    It’s possible that CalPERS’s beneficiaries think it’s NOT in the “education business,” but in the business of investing funds as a fiduciary in order to pay their pensions.

    No competent CEO claims that doing the most basic parts of her job is not her job. Ms. Frost is so out of her league, all she has left is lies. Before she takes the board and a big chunk of CalPERS’s investments down with her, it should toss her to the unemployment wolves – without even a tin parachute.

  13. anon

    Two things re: CalPERS and this subject: 1) Diversity hires are top priority and Marcie was simply that. Qualifications are way down the list. One of the reasons morale is so bad throughout the organization, let alone incompetence. 2) Compliance is largely for show. ECOM was independent from INVO originally with separate independent direct reporting to the Board. The powers that be in INVO quickly nixed that idea and defenestrated ECOM by taking investment related compliance out of ECOM and placing it in INVO with no independent direct reporting to the Board but rather through the CIO and CEO. Mission accomplished. This is not a compliance related “best practice.” Ha! It’s hard for Compliance Officers to promote under such circumstances if they don’t tow the line…

  14. LB

    Same ol’ same ol’ at CalPERS. The managers sexually harass the employees and the whistleblowers get kicked to the curb with threats of firing without pension if you don’t go away. Meanwhile the perps get offered ‘retirement’ when it gets too hot. Deep pockets of CalPERS guarantees those pursuing the truth have several years ahead of them in litigation – if they dare.

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