CalPERS REACTS: CalPERS President Rob Feckner asks staff to propose a policy to ensure disclosure of “placement agents” and their fees, which played a role in the New York pension scandal. To see news release, click here.
PROBE WIDENS: The LA Times says the SEC wants to check the income sources of two members of the Los Angeles Fire and Police Pensions board, Sean Harrigan and Elliot Broidy. To see story, click here.
UPDATE: ProPublica reports that the firm of a man indicted in the New York pension scandal shared fees for helping a private equity firm get investments from CalPERS, CalSTRS and Los Angeles Fire and Police Pensions. To see story, click here.
CalPERS and CalSTRS have invested several billion dollars in a private equity firm, the Carlyle Group, that is part of a public employees pension scandal in New York.
Two associates of a former New York state comptroller, Alan Hevesi, were indicted for selling access to investments from the New York State Common Retirement Fund.
A Wall Street Journal story this week said one of the men, Hank Morris, or one of his associates, reportedly tried “to place other investment firms with government-run funds in California, New Jersey, Connecticut and New York City.”
A New York Times story last week said the other man, David Loglisci, had investment executives “plow hundreds of thousands of dollars” into a low-budget movie, “Chooch,” that he and his brother were producing about a lovable loser from Queens.
The scandal put the spotlight on little-known “placement agents” who collect fees from firms such as Carlyle to help them get investment funds from pension systems. Carlyle and another firm paid $10 million to Morris’s company, the Times said.
The California Public Employees Retirement System has committed about $4 billion to 27 different Carlyle funds, according to the CalPERS web site. CalPERS has a $100 million commitment to another firm mentioned in the scandal, Quadrangle.
The California State Teachers Retirement System has a $1.2 billion commitment to three Carlyle funds.
In the New York fund, one person, the comptroller, can make investment decisions. Havesi, an elected official, is said to have received large amounts of campaign contributions from investment-related firms before he left office in 2006.
In the view of some, CalPERS and CalSTRS have a safeguard. Their major investment decisions are made by the investment committees, which include all of the board members.
But the similarity between the two big California funds ends there.
Two years ago CalSTRS imposed campaign contribution limits on board members, despite opposition from a coalition of major business groups and a split among the statewide elected officials serving on the board.
A decade ago CalPERS, hit by “pay-to-play” allegations, imposed a ban on campaign contributions, which was overturned by a lawsuit filed by former state Controller Kathleen Connell.
“Pay to play” is the notion that campaign contributions help firms get investment funds, or at least be considered. Once burned, CalPERS apparently has not attempted further regulatory action to guard against improper influence of investment decisions.
A spokeswoman, Pat Macht, said CalPERS is evaluating the CalSTRS contribution limits. “Our investment staff tells me they are monitoring what’s going on in New York,” she said.
CalSTRS was rocked by a major scandal in 1983 when its chairman, Gilbert Chilton, got a $1 million kickback on an investment deal, abandoned his wife and daughter and went on the lam for several years with his girlfriend, Chickie. (See Calpensions 17 Mar 09: “CalSTRS: Remembering Gilbert Chilton)
Afterward, CalSTRS switched investment decisions from a three-member panel to the 12-member investment committee. In 2007, campaign contributions from investment-service firms were limited to $1,000 individually or $5,000 in the aggregate per year.
A letter opposing the limits was signed by a dozen major business groups, virtually all of the big ones from the California Chamber of Commerce to the Western States Petroleum Association.
The business groups said the CalSTRS limits would, among other things, hurt the economy, infringe on free speech, duplicate existing broader contribution limits and set a dangerous precedent.
“We see no reason why, if successfully adopted for one industry, they (contribution limits) could not easily be adopted for other industries,” said the letter from the business groups.
The limits apply to the three statewide elected officials on the CalSTRS board — treasurer, controller and superintendent of public instruction — and the governor who makes appointments to several seats on the board.
Controller John Chiang was the only elected official on the board who voted for the limits, said his spokeswoman, Hallye Jordan. State Treasurer Bill Lockyer opposed the limits.
A Lockyer aide, Steve Cooney, said the treasurer’s view is that the state already has a voter-approved contribution limit of $6,000; CalSTRS may lack the legal authority to impose the limits, and having one state agency impose its own limits is bad policy.
Did Lockyer consider filing a lawsuit to overturn the CalSTRS limits?
“We’ve looked at it,” said Cooney. “We don’t consider ourselves an injured party. His decision was not to file a suit.”
Although former Controller Connell’s lawsuit overturned the CalPERS ban on contributions in 1998, her image was injured in some of the court filings.
Allan Emkin of Pension Consulting Alliance told of being pressured by Connell to make campaign contributions while he was negotiating a contract with CalPERS. He said he declined to contribute, even though his firm had a lot at stake.
Leslie Brun of Hamilton Lane Advisors told a similar story of being pressured by Connell and declining to contribute. The CalPERS chief executive, James Burton, told how Connell impeded a proposed contribution disclosure reform in 1995.
As it turned out, Connell seemed to have little need for heavy-handed fundraising. She breezed to re-election in 1998 with no opponent in the Democratic primary and a two-to-one vote margin over Republican Ruben Barrales in the fall.
Burton said in his court statement that the CalPERS contribution ban emerged from a period of concern about “pay to play” practices in public pension funds. The CalSTRS chief investment officer, Tom Flanigan, wrote a letter to the federal Securities and Exchange Commission in June 1997 urging regulation.
“In my judgment, it creates more than a subtle conflict of interest when the industry feels that because of the immenseness of the public pension fund industry and the intimidation of some political entities that they necessarily must respond to campaign solicitations in a positive vein,” Flanigan wrote.
Burton said more criticism of CalPERS came from a Los Angles Time story in February 1998 about “the perceived influence of gifts and contributions” on board decisions and FBI investigations.
One Times story in February 1998 said a CalPERS award of “$225 million to Lombard Investments for high-risk investments in Asia” appeared to have been spawned at a conference held by “the Pacific Pension Institute, a nonprofit run by H. Lawrence Hull, a Lombard Investments consultant.”
A decade later, pension fund officials and members of the investment services industry are still mingling at Pacific Pension Institute conferences.
Photos on the Institute’s web site taken during a winter conference last February in La Jolla show a CalPERS board member, George Diehr; two CalSTRS board members, Carolyn Widener and Jerilyn Harris, and the CalSTRS chief investment officer, Christopher Ailman.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 23 Apr 09