CalPERS continues to demonstrate that its board is both generally unwilling to and incapable of performing its duty of overseeing staff.
While discussing inadequate “the horse has left the barn and is now in the next county” measures in the wake of Chief Investment Officer Ben Meng’s resignation, Investment Committee Chair Theresa Taylor dropped the bombshell that the board has been briefed about a so-far undisclosed fraud. As we’ll show, the context makes clear that the swindle was executed by a staff member, not a vendor. And it was presumably perpetrated either on CalPER’ trust funds or the CalPERS’ health insurance program, otherwise it would not merit board attention.1
Oh, and on top of that, the discussion of the proposed policy change was a train wreck, with the board approving a final policy that had not been reduced to writing.
Earlier this week, the CalPERS Board Governance Committee met. Among other things, it discussed the teeny-weeniest increase of required reporting by staff to the board. Recall that when Chief Investment Officer Ben Meng resigned abruptly in August after this site exposed his violation of California conflict of interest rules via owning Blackstone stock when he approved a $1 billion investment in a Blackstone fund, State Controller Betty Yee was livid. In trying to minimize the oversight failure, CalPERS staffers had told the press that they had found out about the conflict of interest months before, in April, when Meng filed his annual disclosure forms. That happened to be after Meng made his billion-dollar Blackstone commitment in the first calendar quarter of 2020. CalPERS, as in Marcie Frost, decided to do nothing.
We’ll put aside the fact that CalPERS should have known it had a conflict of interest problem the minute it received Meng’s “as of assuming office” financial disclosure form in January 2019. Meng then held stakes in Blackstone, Carlyle, and an Ares credit fund. CalPERS’ size and private equity strategy means it invests regularly in the offerings of the biggest private equity fund managers like Blackstone and Carlyle. There was no way Meng would not wind up eventually approving a Blackstone or Carlyle investment.
We’ll also put aside that CalPERS told the press it had investigated back in April. What was there to investigate? Someone in Compliance cleared their throat when they saw Meng’s financial disclosure filing. The big reason to doubt the assertion that there was an investigation is there was no way to paper the record to pretend Meng’s conflict was a nothingburger.
In other words, Yee was completely correct to be irate over Marcie Frost’s abject dereliction of duty in pretending that Meng’s misconduct was inconsequential and/or would go away, and not informing the board as soon as she became aware of the issue, even if late in the game.
So the proposed remedy was a new policy requiring the CEO to inform the Board when there were any investigations of top executives.1 Note that the policy does not include telling the board what the investigation is about! Appallingly, the final text of policy was never presented to the board in writing; Board Governance Vice Chair Lisa Middleton simply read it out.
Board member Margaret Brown, who is not on the Board Governance committee, questioned why the policy was limited to a handful of senior employees:
Board Member Margaret Brown: In looking at attachment 1 page 9 of 26 the revision line 18 it talks about only certain positions where the Board President would inform or the Board President would know. But you know there are many other positions that where if there is some sort of misconduct or other issues that arises that we should know. I’m not going to mention the one specifically we’ve been told about but under this policy we wouldn’t know about the current issue that’s going on. And so I have concerns that this way too limiting and it needs to be much broader.
If you read this carefully, all that Brown has hinted at is that the board has been informed a staff member that isn’t one of the big dogs is under scrutiny. Given that CalPERS has nearly 3000 employees, one can imagine that there’s a regular stream of allegations, some of which are serious enough to merit a serious look. Had I been asked to guess, I would have assumed a sexual impropriety, since that’s a sensitive area these days.
But Theresa Taylor did the big reveal a few minutes later:
Board Member Theresa Taylor: Finally I want to address the issue on terms of other notification of all employees that Ms. Brown mentioned. Our CEO lets us know when those occasions arise when they are very serious but something like that fraud incident that we are referring to that makes sense to come forward to the board but as a union steward for SEIU I think understanding there is a lot of actions that take place against employees I’m not sure we need to know every single thing.
Understand what happened here.
Taylor set up a straw man. Brown had asked for a review of allegations and finding of fraud and misconduct over the past three to five years to determine what the proper threshold should be. Brown did not call for comprehensive reporting but that would be far better than just guessing that disclosure for a few top execs would do (although frankly I don’t see why the board should not get a table or monthly summary of allegations and the status of inquiries).
But more important, Taylor exposed the contents of closed session, that CalPERS has had a “fraud incident” involving someone other than a high level executive. Has this cheating been reported to law enforcement? If not, why not?
We’ve also reported on CalPERS’ slipshod IT and financial controls. One has to wonder if these lapses were what allowed this fraud to occur and if anything is being done about them. Or is the board too trusting of Frost even to ask basic questions like that?
Needless to say, this is yet more proof that Frost is incapable of doing the basics of her job, like running a tight ship. But she’s mastered the one skill she needs to survive, which is toadying to the board. Their laziness makes that an easy task.
1 The draft language, from p. 9 of this document:
Through the Board President, monitor investigations into allegations of misconduct by the Chief Executive Officer, Chief Actuary, Chief Compliance Officer, Chief Financial Officer, Chief Health Director, Chief Investment Officer, Chief Operating Officer, or General Counsel. Upon receipt of a plausible, non-frivolous allegation of misconduct by any of the aforementioned personnel and a preliminary determination that the allegation, if substantiated, would constitute misconduct, management (the CEO unless the allegation concerns the CEO) will notify the Board President and the Chair of the Risk and Audit Committee. Management will inform the full Board upon the commencement of a formal investigation into the alleged misconduct.
2 If a CalPERS staff member had defrauded a vendor, CalPERS would have reflexively defended the staffer. Even if it had had to settle with a the outside party, CalPERS would have sought a gag and internally tried to depict itself as settling reluctantly, as opposed to the vendor being dead to rights. CalPERS wouldn’t even necessarily concede that internally even if it had lost a lawsuit. So the idea that the board would be notified of staff financial misconduct with an outside party is a non-starter.