The wicked flee when no man pursueth: but the righteous are bold as a lion.
Yesterday, we published a partly-redacted version of a CalPERS board “closed session” transcript that its attorney Durie Tangri had mistakenly made public.1 This meeting took place shortly after we exposed that Chief Investment Officer Ben Meng had approved a $1 billion commitment to a Blackstone fund when he also held Blackstone shares, which was a violation of California’s conflict of interest laws. Meng resigned with immediate effect three days after we published our post.
Our discussion today will focus on how the CalPERS board has swallowed a completely false story, that Meng resigned due to dirty laundry that should have been secret nevertheless getting out. In fact, all of the damaging information that got Meng so upset that he quit was public, and it all came directly from or was generated by Meng.
Yet the CalPERS board acts as if it’s the victim of internal saboteurs. As the transcript shows, CEO Marcie Frost and her key allies on the board, Board President Henry Jones and board member Rob Feckner repeatedly and falsely present Meng as a victim of secrets having been tossed over the transom to the press. Not only was everything that embarrassed Meng out in the open for competent reporters to write up, but in at least one and arguably two cases, Meng’s defensiveness made his situation much worse.
As we’ll show, Frost used the bogus idea that CalPERS is full of traitors as an excuse for continuing to keep the board in the dark about crucial matters like Meng being investigated for his financial conflict of interest. Frost and Feckner also claim that Meng believed that his bad press was due to saboteurs. That suggests that Frost and other senior staffers stoked Meng’s paranoia and helped precipitate his departure.
In fact, a careful reading of the transcript against CalPERS’ statements to the press suggests that what bent Meng out of shape was that Frost, general counsel Matt Jacobs, and the inner circle of the board had cooked up a deal with Meng: he’d confess to his conflict of interest sins privately, at a September board meeting, take a modest sanction, and the public would be none the wiser.
As we pointed out yesterday, the publication of most of this secret board transcript is due to a remarkable error. Former board member JJ Jelincic sued CalPERS to disclose this very document after the giant fund refused. Jelincic alleged that the “closed session” was improper and hence the transcript had to be published. CalPERS’ law firm, due to a mistake in accessing the court website, made a filing meant for the judge’s eyes only available to the world.
We explained yesterday how the partial transcript proves that Jelincic was correct: the conversation was entirely about policy and process matters that are required to be discussed in open board meetings. It also exemplified the fund’s stunning arrogance. CalPERS gave a big raised middle finger to Judge Michael Markman by redacting large sections of the transcript, when the point of an in camera review is for the judge to determine if a request to keep material secret is legitimate. Judge Markman can’t make that call when CalPERS withholds key parts.
Today we’ll go into more detail about how the board has been sold a boatload of bunk as to why Meng resigned and why that matters.
Ben Meng’s Inability to Take the Heat of Office, Compounded by Self-Inflicted Wounds
The CalPERS Chief Investment Officer position is the best paid at CalPERS and the best paid in the US, with the first year package a potential $1.7 million. The big bucks reflect the importance and difficulty of the position, including being accountable when things don’t work out well. Andrew Silton, the former Chief Investment Officer of the much smaller North Carolina state public pension fund, remarked that getting roughed up when performance was less than stellar, and having to address other problems was part of the job.
Of Meng’s three major controversies, one was entirely predictable and he was well positioned to ride it out. The other two were self-generated. Meng made his bad situation much worse by getting defensive.
And in all three cases, everything that went down that worked against Meng was out in the open.
The first was when Republican legislators attacked Meng for having come to CalPERS after working for the Chinese government overseeing the investment of some of its foreign exchange reserves. As Bloomberg explained last August:
Earlier this year, he was accused by Republican Congressman Jim Banks of being a tool for the Chinese government, funneling American money into Chinese hands due to his role at SAFE. Arkansas Senator Tom Cotton and Wyoming representative Liz Cheney, both Republicans, expressed support for Banks’s inquiry into Calpers’s and Meng’s ties to the Chinese government.
It’s hard to fathom how Meng didn’t see this coming when he joined CalPERS. Trump was in office going full bore after China, using the blunt instruments he has as President. Even without Trump’s China-bashing, there are plenty of pension opponents who would grasp at any opportunity to generate a negative story. Linking Commies, China, and perceived to be too-fat funds would get some traction for a news cycle or two. But with nothing more than that, the noise was destined to die out quickly, as it did.
Indeed, Meng seemed to lack the perspective that as unpleasant as the bad headlines might seem, they garnered sympathy where it mattered: in Democratic-run California, with a large Chinese community, and among investment professionals.
Yet the transcript presents Meng as unable to handle this obviously partisan roughing-up:
BOARD MEMBER FECKNER: If you were to actually ask him point blank, sit down and have a conversation with him, he will tell you it’s because of the outlandish press information to the outside. The press that he’s getting from one, two, sometimes three Board members is what drove him to this point. He could not, in his own good conscience, continue to stay here, and go through this, and put his family through this turmoil again. We almost lost him six, eight months ago when the whole China issue came up.
This in a nutshell is the garbage barge the staff cronies on the board, Jones, Feckner, and board Vice President Theresa Taylor are trying to sell to the rest of the board: that Meng left because bad board members roughed him up. Yet Feckner immediately demonstrates that this claim is an utter fabrication. Feckner presents Meng’s sensitivity to being beaten up by Republicans seen as combo plates of whack jobs and investment ignoramuses, when no CalPERS board member whatsoever piled on . So how is this the board’s fault?
And if Meng actually believed that board members were stoking the Chinese Commie hysteria, that’s unhinged.
The second big blowup on Meng’s watch was when he cancelled two tail risk hedging programs, and the giant fund exited both just before March 2020, missing a $1 billion payday in the Covid-induced market swan dive.
This was a change in the portfolio composition that should have been reviewed and approved by the board. It wasn’t. As a result, Margaret Brown, seeking to give Meng something positive to talk about at the March board meeting, asked how the tail hedges were doing. Meng lied. From an April 2020 post:
BOARD MEMBER MARGARET BROWN: Ben, can you tell me how our left-tail investments are performing? Are they performing the way we thought they would in this economic downturn?
CHIEF INVESTMENT OFFICER MENG: Good morning, Ms. Brown. Yes, for any left-tail risk hedging strategy you’re referring to, they should perform well in this kind of a down market, as they were exactly designed to do. And from what we know are most of these strategies are performing as anticipated.
Had Meng syndicated the decision by getting it approved by the board, he could not have been blamed when it went sour. But irate staff members leaked the story to Bloomberg and fingered Meng for ignoring CalPERS’ consultant Wilshire. From the same post:
The damning Bloomberg report by Erik Schatzker is almost certainly the result of leaks by unhappy insiders. It states both staffers and even CalPERS’ outside expert Wilshire opposed the move but Meng overruled them. From the article:
Calpers had been warned about the perils of shifting strategy. At an August 2019 meeting of its investment committee, Andrew Junkin, then one of the pension plan’s consultants at Wilshire Associates, reviewed the $200 million of tail-risk investments.
“Remember what those are there for,” Junkin told Calpers executives and board members, according to a transcript. “In normal markets, or in markets that are slightly up or slightly down, or even massively up, those strategies aren’t going to do well. But there could be a day when the market is down significantly, and we come in and we report that the risk-mitigation strategies are up 1,000%.”
Institutions like CalPERS hire advisers like Wilshire not just for their acumen but also as a liability shield. This bad call sits entirely on Meng’s shoulders.
Note that Junkin recommended keeping the hedges on when its estimate of the payoff was over 3 times lower than what the one Meng killed would have generated.
Now this is the one case where even though Meng was the creator of his own mess, he could say staff members running to the media got him in hot water.
But they did so because he had violated well-established processes for making investments. And that’s because Meng was arrogant to think he was smarter than both his staff and Wilshire. Had Meng tried to get approval cancelling the hedges to the board, Wilshire would have politely opposed it. Andrew Junkin was so trusted by the board that that would have been a very hard sell.
And….drumroll…despite this being one of the few cases where the “meanie leakers” charge has merit, the board again, contra Feckner and other uniformed board members, had absolutely nothing to do with these stories. They learned about the cancellation of the tail hedges from the press!
Another key fact that is lost in the “poor Ben” version of the story is that the de facto staff revolt by going to the press was a symptom of much deeper problems. First, Meng had exceeded his authority in exiting the program, yet the staff had no outlet for alerting the board save by going outside. Second, these leaks were a sign of lack of confidence in his leadership. We’d pointed out how Meng had driven out two highly respected investment professionals, Ron Legnado and Paul Mouchakka. That would also have rattled the more capable members of the investment team.
The loss of day-to-day confidence of his team likely weighed on Meng more than the bad press clips. Knowing that some, perhaps many, of your nominal subordinates don’t think much of you is psychologically draining.2
Despite giving up $1 billion, investors do make bad calls from time to time. Meng could have ridden this one out had he not called more attention to his mistake.
The very short version is Meng tried to justify his bad bet, rather than shutting up about it, by saying the tail hedge products were too pricey relative to their potential payoff. That got him in a press war with Universa, the manager of the bigger hedge that CalPERS had invested in. Universa manages its tail hedges at much lower cost that its competitors, so Meng’s defense amounted to a smear on them.
Nassim Nicholas Taleb is an adviser to Universa. Taleb has a much bigger microphone than Meng does. And he does not suffer fools.
Universa’s PR firm also piled on, since the dustup provided an opportunity for Universa to publicize their spectacular returns in the coronoacrash. Institutional Investor and later the Wall Street Journal wrote follow on stories that almost certainly would never have appeared had Meng laid low.
The third fiasco, the one that led to Meng’s sudden resignation, was yet another act of self-sabotage. And the board and loose-lipped insiders had nothing to do with it. It only took three bits of information, and all were public.
The sorry part of the last chapter of Meng’s short career at CalPERS is that it makes clear that top to bottom, board members are utterly ignorant of the information CalPERS cranks out for board meetings and posts periodically. If they don’t pay attention to what staff serves up to them, they can’t begin to do a proper job of supervising the fund.
I had obtained Ben Meng’s Form 700 financial disclosure forms for as of when he started office, in January 2, 2019, and year-end 2019. CalPERS had managed to call attention to Meng by initially not posting his form as had been CalPERS’ long established practice for its CIO.3
The form for year-end 2019 showed, remarkably, that Meng still owned shares in Blackstone, Carlyle, and an Ares credit fund, as he had when he joined CalPERS. That was shocking because Meng was guaranteed at some point to wind up approving investments in Blackstone and Carlyle funds, which would put him in violation of California’s political conflict of interest laws.
It didn’t take much digging to find CalPERS’ recent private equity investments and in particular, the first quarter 2020 $1 billion commitment to a Blackstone fund.
The post also documented at considerable length a point that the press chose to ignore: that Meng’s later Form 700 was felonious, since signed it under penalty of perjury, yet failed to disclose the timing and extent of stock sales and purchases. You could see he had to have made them by comparing the two forms, assuming the disclosure of what he owned at both points in time was accurate.
We showed our work in our August 2 post. It was all from public sources. Yet the board has been conned into believing that nefarious insiders somehow fed it to us.
The only basis Meng might have for thinking insiders were out to get him was that the day after our post appeared, the Fair Political Practices Commission received two anonymous complaints about Meng. The fact that two complaints came on the heels of each other does not prove that they came from insiders. If anyone had bothered to look at what it takes to file a Fair Political Practices Commission compliant, it would be trivial to generate one based on the detail in our post.
But Meng and some CalPERS board members still assumed the anonymous complaints came from staffers, say members of the compliance team unhappy that CalPERS had attempted to cover up Meng’s malfeasance (more on that in a future post).
Frankly, it would be far more logical to assume that we had filed one of the complaints. And it only takes one complaint to get the FPCC to saddle up.
CalPERS’ “Quislings Everywhere” Paranoid Delusions
Contrast the record of what actually happened with the CalPERS funhouse mirror version you find in the meeting transcript.
The discussion was almost entirely about Meng’s resignation and the trigger, the unexpected exposure of his financial conflict of interest. The word “leak” appears in some form appears 25 times, along with other complaints about media coverage, like “gotcha” stories. But the fantasies are piled high and deep. Board President Jones is the self-appointed fabulist-in-chief. For instance:
PRESIDENT JONES: Late April, whenever — it was late April, early May, somewhere in there, Ms. Frost called me and said that they may have a problem with the Form 700 from Mr. Meng. And I said, well, what are your — what steps are you taking? And she said, well, we’re going to start the investigation…
So that was the – how I knew about the occurrence. And so what happened, as all of you know,
somehow the information was leaked about•this investigation.
Jones harps on this idea later in the meeting:
PRESIDENT JONES [On the board’s reaction to the conflict of interest stories breaking]: Then what happened is that the leak occurred. And of a sudden all this information was out there..
It is remarkable to see that either Jones relishes the role of fronting for Marcie Frost’s spin, or he really is to thick to realize that the press stories had absolutely nothing to do with the investigation and came entirely from CalPERS own public records?
Mind you, there is one way CalPERS could have gotten the idea that their investigation had leaked, and it’s the result of their paranoia.
The day the two Fair Political Practices Commission complaints were filed, a Pensions & Investments reported contacted a very well networked Californian who has never been a CalPERS staff or board member. The journalist was looking for someone who could comment on how the Fair Political Practices Commission investigations worked. The source referred the reporter to Lance Olson, who is the top lawyer in California on the FPPC.
Lance Olson was handling the Meng investigation for CalPERS. Olson almost certainly would have told someone at CalPERS that he’d gotten a call from a reporter and had not taken it.
Thus the only explanation (aside from the staff fabricating that the investigation had been leaked to try to gain the upper hand with the board) was that a CalPERS employee heard about the call to Olson and jumped to the erroneous conclusion that the reporter had been tipped off about Olson working on the investigation.4
Matt Jacobs tries to have it both ways (at least in the parts we can see) acting as if leaks were a fact, but depicting it as Meng’s opinion that they came from CalPERS sources:
GENERAL COUNSEL JACOBS: He is very concerned about the leaks that he thinks have come out of CalPERS and/or the Board.
When State Controller Betty Yee complained, as other board members did, of not having been told about the investigation, Frost revealed the reason for harping on the canard that the board couldn’t be trusted (as if that’s her call to make!): it’s her justification for giving the board the mushroom treatment:
CHIEF EXECUTIVE OFFICER FROST: Yeah, and I — you know, thank you. And I would really, you know, like to have a conversation with this full Board. And, you know, at some point, you know, I can excuse the team and we can walk through this. But, you know, we do have an investigation around confidential information leaking. You know, I would love to have a conversation about how do we — how do — how do we work on that as an organization? That, you know, the Board has an extremely important role, management has an extremely important role, but all of it is about protecting CalPERS.
As we have stressed “CalPERS” as in the nearly 3000 person organization, has no standing under the law. The notion isn’t mentioned once in the law that governs the giant fund, the Public Employees Retirement Law. The organization exists only as an instrumentality of the board. For Frost to act as if she the CEO can tell the board what to do and withhold information is rank insubordination. The CalPERS board of the 1990s would have publicly excoriated any CEO who tried pulling a stunt like that once, and would have showed them the door if they tried it a second time.
To their credit, some board members with spine objected. Stacie Olivares called out Matt Jacobs when he suggested the staff could withhold information about personnel matters because staff had the nerve to sit in judgement on their trustworthiness:
BOARD MEMBER OLIVARES: I never have understood the employees having any right to have their –the issue not discussed in closed session with the Board. Now, obviously, if a Board member leaks that information, that’s going to put the Board and that individual in danger of some action against them by Mr. Meng or someone else, and that’s certainly problematic. But the fundamental question of whether the Board can hear about personnel matters, if that is not a possibility, I think we need to understand that more clearly, because I had certainly always felt that we could hear those matters in detail.
Board member Margaret Brown pointed out that a Bloomberg “You were there” type story on August 8, which smacked of being planted by CalPERS by virtue of including details of a private meeting between Frost and Meng and being very Meng-friendly, also mentioned his fragile mental state. Brown asked how was that disclosure consistent with the professed concern about Meng’s privacy rights. Frost deflected the question by trying to pretend CalPERS didn’t pitch the story to Bloomberg.
Olivares also challenged that the (bogus) notion that the board was talking to the press:
BOARD MEMBER OLIVARES: You know, the leaking of the information about the investigation is no~ the problem. The problem is the Board members who were then asked about it didn’t know anything about it. So the leaking is sort of secondary to what I think is the fundamental problem is that we didn’t know that this was happening.
The most forceful skeptic was Jason Perez:
BOARD MEMBER PEREZ: My — disappointing is not even a strong enough word. I’m angry over this whole process. I’m angry that we weren’t notified. I’m angry because ultimately the court and U.S. — or the California Constitution we, Board members, are responsible for the actions of everyone in that building at CalPERS.
We absolutely should have been notified sooner. We –it seems like staff or team members are — or even some Board members are always referring to the leak, the leak, the leak, the leak. Well, obviously, in this case, that leak didn’t come from the Board. So I don’t know that we continue to use a leaky Board where information is being sent out, we need that information.
Disappointingly, the considerable upset of some members of the board about being denied information has gone nowhere. But the die was cast when the board refused to fire Frost for her misrepresentation of her education, an offense that would have gotten her shown the door in a functioning organization. This board would rather go down with Frost and Jacobs rather than show enough steel to get them to shape up or leave.
1 Supporting our view that making the document public was a big mistake, as opposed to a clever stratagem, this e-mail is time stamped less than two and a half hours after we posted it. Keep in mind it had already been up for over five days and was still up as of end of day Pacific time yesterday:
Sent: Wednesday, August 25, 2021 1:10 PM
Cc: SERVICE-JELINCIC <SERVICE-JELINCIC@durietangri.com>; email@example.com; firstname.lastname@example.org
Subject: Jelincic v. CalPERS – Case No. RG21090970 – In Camera Document Filed Publicly
Dear Clerk of Court,
Regarding the above-captioned case, it appears that Defendant’s Closed Session Transcript, lodged on August 18, 2021, has been filed on the public docket. As this was lodged with the Court for in camera review, Defendant respectfully requests that the filing be promptly sealed.
Joyce Li (she/her) | Attorney | Durie Tangri LLP | email@example.com | 415-376-6482
2 Before you think this is an exaggeration, I received multiple e-mails from investment office insiders, currently and recently ex CalPERS, with specific complaints of how he managed staff and his investment decisions.
3 Specifically, I had put in a Public Records Act request with CalPERS for Meng’s and other Forms 700 in June 2020. Even though I could have gotten the same records from the Fair Political Practices Commission in mere days, the point of going to CalPERS was to put them on notice that they really needed to put them on the CalPERS website as before. CalPERS dragged its feet, which I originally took as personal, since they slow-walk my PRAs as a matter of course. But I now wonder if was a sign that they feared I had or would connect the dots with the March 2020 $1 billion Blackstone commitment.
4 Only someone very unsophisticated could have jumped to this conclusion. If a reporter had been told that Olson was representing CalPERS with respect to Meng, the journalist would have known a call to him would go unanswered.CalPERS Meng Transcript Filed In Camera