Archive for the “Pension Funds” Category

The Carlyle Group, one of the nation’s biggest and most prominent private equity funds, will pay $20 million to resolve accusations of pay-for-play ties to a New York state pension fund. In addition to the $20 million settlement, Carlyle employees are banned from making any campaign contributions to public officials who have clout over pension fund investment decisions.

D.C.-based Carlyle Group is one of several firms linked to a two-year investigation by New York Attorney General Andrew Cuomo over possible illegal payments to influence investment decisions of the New York State Common Retirement Fund. In March, Hank Morris, the top political aide to former New York State Comptroller Alan Hevesi, was indicted, as well as the pension fund’s chief investment officer David Loglisci, on charges the duo asked for and received kickbacks from companies that sought access to public pension fund investment dollars.

Carlyle paid $13 million to Morris for his help in influencing the New York State Retirement Fund, which ultimately invested more than $730 million with the equity fund.

As reported May 18 by Bloomberg, Carlyle’s settlement makes it the first money manager to adopt what NYAG Cuomo calls a new “code of reform” for the municipal-pension market. The code, which is designed to create greater transparency and accountability over the pension fund investment process, prohibits money managers from conducting business with a public pension plan for two years after making political donations to officials who have influence over the fund’s investment decisions. A similar idea was proposed by the Securities and Exchange Commission (SEC) in 1999, but went nowhere following opposition from politicians and investment industry insiders.

Carlyle’s May 18 settlement takes the legal heat off in terms of possible criminal charges, since the company and its executives will not be subject to any criminal liability. Cuomo is, however, continuing to investigate Riverstone Holdings LLC, a New York private equity firm that has a joint venture with Carlyle. Funds managed by Carlyle alone or with Riverstone received about $730 million in investment commitments from the New York fund, according to Bloomberg.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

State Street Corp.’s reputation continues to be called into question. This time, accusations of misrepresentation and negligence are coming from Massachusetts Secretary of State William Galvin, who is investigating the Boston-based financial services firm on claims it hid the risks of certain bond funds from pension fund clients.

Galvin confirmed last week  his office has opened a probe of State Street and the State Street Limited Duration Bond Fund. In a story appearing April 30 in Investment News, it was reported that the fund is among several fixed-income strategies managed by State Street’s investment unit, State Street Global Advisors, to lose substantial amounts of money because of exposure to the subprime mortgage market.

Pension funds and other institutional investors initially invested in the Street Limited Duration Bond Fund as an “enhanced cash fund,” with the idea to generate better returns than ultra-safe, conservative money market funds with just slightly more risk. Investors now say the Limited Duration Bond Fund took on large positions of high-risk mortgage-related assets, a move that ultimately proved devastating for investors.

When the subprime mortgage market went south, bond funds like the Limited Duration responded by plummeting in value.

More than a year ago, several lawsuits were filed against State Street over charges the firm misrepresented the risks of various bond funds, including the Limited Duration Fund. Perhaps anticipating a legal outcome in favor of investors, State Street subsequently set up a reserve fund containing millions of dollars to cover possible future payouts. Now facing additional investigations, State Street may need to infuse even more funds into that reserve.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Massachusetts Secretary of State William Galvin has launched an investigation into State Street Corp. and whether the Boston-based firm portrayed a bond fund that invested in high-risk derivatives, swaps and subprime-mortgage securities as a low-risk, conservative investment to pension funds and retirement plans.

The center of Galvin’s investigation is an enhanced index bond fund known as the State Street Limited Duration Bond Fund. The fund itself was supposedly created as a way for pension funds and other institutional investors to generate better returns than ultra-safe money market funds, but with only slightly more risk. Instead, it turns out the fund invested heavily in risky mortgage-related products - products that ultimately plummeted in value following the collapse of the subprime market.

In addition, the bond fund was highly leveraged, borrowing money to make bigger bets on mortgage-backed securities. The strategy ultimately caused more financial losses.

According to an April 30 article in the Wall Street Journal, Massachusetts’ Galvin wants to know if State Street marketed and sold the Limited Duration Bond Fund as a “safe” investment to pension funds despite the fact it held risky instruments considered inappropriate for that sector of investors.

Inappropriate bets on subprime mortgages have plagued State Street’s enhanced index funds for some time now, making the company the focus of several lawsuits. On April 8, the Sisters of Charity of the Blessed Virgin Mary, based in Dubuque, Iowa, sued State Street, charging it of putting their money in risky subprime mortgages instead of the more conservative investments State Street’s financial advisors had promised.

The nuns say they have lost more than $1 million.

In a document that State Street apparently gave clients on another enhanced bond index fund, the Government/Corporate Bond Fund, investments are described as those in a “broad-based, investment-grade fixed-income universe.” As of March 31, 2007, however, the fund had nearly half of its weighting in mortgage-backed securities and other risky asset-backed products, according to the Wall Street Journal.

By comparison, the same fund’s biggest weighting in September 2005 was in U.S. Treasurys, while mortgage- and asset-backed securities accounted for less than 6% of the fund’s top 10 holdings, according to the Wall Street Journal.

State Street also is at the center of a 2007 lawsuit filed by Prudential Financial, which claims the firm deceived the insurer by investing in products whose returns were linked to 20 high-risk subprime mortgage pools.

In early 2008, State Street replaced William Hunt, CEO of State Street Global Advisors, amid growing controversy of the company’s ties to subprime mortgages and other toxic financial products.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Hoping to permanently shatter the “Greed is Good” line made famous by fictitious corporate raider Gordon Gekko in the movie Wall Street, Andy Stern, president of the Service Employees International Union (SEIU), has sent a scathing letter to 29 financial services firms over executive bonuses tied to inflated profits on derivatives and other investments that ultimately turned out to be worthless. Stern called upon the companies, which included American International Group (AIG), Citigroup, Morgan Stanley, and JP Morgan Chase to either pay back the bonuses immediately or get prepared to face a slew of lawsuits.

The SEIU’s pension fund, known as the SEIU Master Trust, wants the firms’ boards of directors to review more than $5 billion in bonuses and stock option awards that were given to their companies’ top five executives since 2005.

In addition, the pension fund is demanding the companies overhaul their executive compensation practices.

 “The collective choices of top executives to reward themselves despite their failure to deliver a profit on their investments negatively impacted our pension fund and left our economy in shambles,” said SEIU’s Stern in an April 20 article by Bloomberg. “It’s as if these guys got a windfall payoff for betting the family’s savings on the wrong horse.”

All of the companies in question have come under fire recently over executive compensation issues. Leading the pack is financially troubled AIG, which has been bailed out by the U.S. government multiple times and received more than $185 billion in funds. Despite the taxpayer-funded rescue, as well as a $62 billion fourth-quarter loss, the insurer turned over $165 million in executive bonuses in 2008.

Meanwhile, pension funds investing in AIG and in other firms that awarded over-the-top bonuses to executives while their companies struggled financially have lost billions of dollars.

News of the AIG bonuses led Congress to create legislation in March that would establish a 90% tax on bonuses at any company receiving $5 billion in government aid.

The SEIU Master Trust held investments in all 29 financial services firms that received a letter from Stern.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

It’s become a familiar scene across the country: Public pension funds gambled billions of dollars of their employees’ retirement money in the high stakes world of hedge funds. Now, as pension fund managers discover that their hedge funds investments have delivered far less than what they expected, many people are left to wonder if their golden years will instead be spent logging more time in the workforce.

Long before Bernard Madoff made front page news for his $50 billion hedge fund Ponzi fraud, hedge funds were garnering the attention of state and federal regulators for their lack of transparency and opaque oversight standards.

Despite this veil of secrecy, public pension funds nonetheless gravitated to hedge funds in droves, putting their money into everything from real estate to private equity funds. In 2005, 13% of all public pension funds invested in hedge funds, according to an April 15 article in the New York Times. Three years later, the percentage had climbed to 40%.

The apparent infatuation of public pensions and hedge funds may be changing, however. Faced with the grim reality of massive losses on their hedge fund investments, more pension funds are scaling back or, at the very least, trying to change the terms of their hedge fund investments.

The California Public Employees’ Retirement System (Calpers) is a prime example. As reported in the New York Times article, the nation’s largest public pension fund is trying to reduce hedge fund fees and alter the terms of its investments to hedge funds. The decision comes after Calpers saw its investments in hedge funds fall from $7.6 billion to $5.9 billion.

Moreover, the annual returns Calpers has achieved since it began investing in hedge funds in 2002 have been modest at best: only a 3.5% annual rate of return. The percentage is far, far less than what it initially had been promised by Caplers’ hedge fund managers, according to the New York Times story.

As for hedge funds, many are in no position to question the demands of investors like Calpers. In the past year, hedge fund assets have collectively fallen by nearly 40% to $1.2 trillion due to record losses and redemption requests. Adding to the industry’s blight are state and federal investigations into whether certain hedge funds made illegal payments to intermediaries in order to gain access to state public pension funds.

Among the hedge firms under investigation by the Securities and Exchange Commission (SEC) and New York Attorney Andrew Cuomo as having paid fees to garner business from the New York State Common Retirement Fund are the Carlyle Group, Odyssey Investment Partners, and HFV Asset Management LP. On April 15, Barrett Wissman, an executive at HFV, pleaded guilty to securities fraud and agreed to a $12 million settlement as part of the investigation.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

U.S. pensions are encroaching upon dangerous territory these days, with the amount of under funded plans nearly doubling to $373 billion from just five months ago. For many already financially strapped companies, this means they must somehow come up with even more dollars for contributions if they hope to close pension funding gaps in the future.

As reported March 23 by Bloomberg, the dramatic plunge of U.S. stock prices will saddle 53% of companies in the Standard & Poor’s 1500 Index with defined-benefit plans with about $70 billion in pension expenses this year. That’s a sevenfold increase from 2008.

Dow Chemical and Sears Holdings Corporation are among the companies facing under funded pension plans. Dow, whose pension plan was under funded by $4 billion at the end of 2008, expects to more than double pension contributions to $376 million from $185 million last year, according to the Bloomberg article.

As for Sears, it may need to nearly triple pension contributions to $500 million next year if pension reforms aren’t enacted and the financial markets fail to rebound.

Meanwhile, the state of New Jersey is suing former executives of Lehman Brothers, charging fraud and misrepresentation caused New Jersey’s public pension fund to suffer more than $118 million in losses.

According to the lawsuit filed March 17, “thirst for profit” and “simple greed” on the part of Lehman’s top executives, including former embattled CEO Richard Fuld, were behind the investment firm misstating its financial position when New Jersey bought more than $180 million worth of Lehman shares in April and June 2008.

The lawsuit also contends that Lehman executives provided false and misleading statements about the firm’s liquidity, the value of its assets and its ability to hedge against risk.

As reported in a March 17 article in the New York Times, this is the second lawsuit filed by a government entity that names former Lehman executives as defendants. In November 2008, San Mateo County, Calif., accused Fuld and other Lehman executives of making false statements that ultimately led to a $150 million loss in the county’s investment pool.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Public pension funds across the country are playing a financial game of hide and seek, as retirement fund administrators use accounting gimmicks to give the appearance that all is right with their funds. In reality, the numbers game has created a massive sense of false security. Not only are countless pension funds drastically under-funded today, many have entered crisis territory.

In recent years, states and cities from California to Philadelphia have resorted to issuing pension bonds as a way to fill growing deficits in their retirement funds, while generating a higher return than what they paid in interest.

That was the plan anyway. As reported in a March 3 article by Bloomberg, back April 2007 the Chicago Transit Authority retirement fund opted for what it thought was a quick fix to raise money and boost its dwindling assets: issue $1.9 billion in pension obligation bonds.

As it turns out, the CTA retirement plan ultimately found itself paying out more to bondholders than what it took in from the new money, according to Bloomberg. Instead of reversing its funding gap, the CTA wound up digging itself into an even deeper financial hole by the end of the year.

According to the Center for Retirement Research at Boston College, public pensions in the United States showed total liabilities of $2.9 trillion as of Dec. 16, 2008. Their total assets are about 30% less than that, or $2 trillion.

Since then, stock market losses have wreaked further havoc on U.S. public pensions, causing them to be under-funded by more than $1 trillion. This lack of funds is one of the reasons that many U.S. retirement plans elected to issue some $50 billion in pension obligation bonds over the past 25 years, according to Bloomberg.

In the case of CTA, the retirement fund borrowed $1.9 billion by promising to pay bondholders a 6.8% return. The proceeds of the bond sale, held in a money market fund, earned 2%. That is 70% less than what the fund was paying for the loan.

Accounting gimmicks

Pension fund managers often use an array of slick accounting methods to play down or mask the severity of a pension fund’s true financial state. One of those accounting strategies is to report artificially higher expected rates of return.

Case in point: For the past eight years, the California Public Employees’ Retirement System has reported an expected rate of return of 7.75%. In actuality, its return has been 3.32%. In 2008, it lost 27%. 

“It’s pitiful, isn’t it?” said Frederick “Shad” Rowe, chairman of the investment firm Greenbrier Partners, in the March 3 Bloomberg article. “My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time.”

Even before the nation’s credit crunch, many public pension funds were headed down a road of financial trouble. Now, with the stock market continuing to falter, those troubles are only multiplying. For many pension funds, the recourse is to issue pension bonds.

In 2008, the government of Puerto Rico borrowed $2.9 billion through pension bonds, betting that it could reap annual returns of 8.5% investing the money, while paying bondholders 6.5%.

So far the gamble hasn’t paid off. The 8.5% expected rate of return has become a loss of more than $200 million, according to Bloomberg.

Then there’s New Jersey. In 1997, then-Gov. Christine Todd Whitman sold $2.8 billion of bonds to help close a $4.2 billion deficit in the state’s pension fund. Later on, New Jersey increased benefits by 9% for some public employees after market gains closed the gap.

The strategy went by the wayside in 2001 as the economy slipped into a recession. According to a May 4, 2008, article in the Washington Post, pension fund returns fell below the interest rate on New Jersey’s bonds, and the state, faced with budget deficits, stopped making the annual contributions necessary to keep pace with rising costs.

In 2008, the Pew Center for the States, a not-for-profit public policy research group, reported that New Jersey’s seven retirement funds had a combined deficit of more than $28 billion, up 14% from 2007.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

In what appears to be a page right out of the Bernie Madoff book on hedge fund fraud, money managers Paul Greenwood and Stephen Walsh are charged with bilking $550 million out of investors, state and city pension funds and higher education institutions in order to fund elaborate personal purchases that included multimillion-dollar mansions, rare books and 1,350 Steiff teddy bears.

Like Madoff, Greenwood and Walsh had been revered on Wall Street - their supposed investment prowess legendary among clients and colleagues across the country. For years, the two men succeeded in living up to the hype with claims of outperforming the Standard & Poor’s 500 Index. Their bragging came to an abrupt halt on Feb. 25, however, when FBI agents arrested them on conspiracy, securities and wire fraud charges.

The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission brought separate civil charges against Greenwood and Walsh. In its 22-page complaint, the CFTC charged the two men of fraudulently soliciting some $1.3 billion from investors over the past decade.

Greenwood, 61, and Walsh, 64, are principals of the Greenwich, Conn.-based hedge fund WG Trading Co. LP and Westridge Capital Management in Santa Barbara, Calif. According to SEC documents, the duo conned investors with an elaborate hedge fund investing strategy that involved buying and selling equity futures and enhanced equity index arbitrage trading. 

As part of the scam, investors were told that their money was going toward “conservative” investments. Instead, court documents say the funds were used as a personal piggy bank by Greenwood and Walsh. Included in their buys: $160 million for personal expenses, $80,000 for a Steiff teddy bear (Greenwood is said to own the world’s largest collection), a $10 million property in North Salem, a $4 million home on Long Island’s Gold Coast and a 54-acre riding school and horse farm once belonging to the now-deceased actor Paul Newman.

A number of pension funds and universities are included among those who lost money to Greenwood and Walsh. The Sacramento County Employees’ Retirement System in California reportedly invested nearly $90 million with Westridge Capital Management. The Iowa Public Employee’s Retirement System invested nearly $340 million, and the University of Pittsburgh and Carnegie Mellon University collectively invested $114 million.

According to court documents, there may be as many as 16 universities or public-employee pension funds that used Westridge Capital Management as their investment advisor.

Federal authorities believe the swindle by Greenwood and Walsh could date as far back as 1996. The two men were caught only this month during a routine audit investigation by the National Futures Association. The association found $812 million in assets on the balance sheets of the pair’s hedge fund, with $794 million in promissory notes due from Greenwood and Walsh.

If convicted, Greenwood and Walsh could spend up to 20 years in prison on each of the fraud counts and five years for conspiracy. They currently remain out of jail on a $7 million bond.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Government retirees enrolled in Wisconsin’s state pension fund are in for a shock this May: For the first time ever, their pension checks will be smaller. The Core Fund, which is managed by the State of Wisconsin Investment Board (SWIB), reported its lowest level in five years: a -27% return in 2008, while the riskier Variable Fund is down nearly 45%.

The State of Wisconsin Investment Board manages money on behalf of the Wisconsin Retirement System, which covers about 540,000 retirees and employees of school districts and state and local governments in Wisconsin. Because of Core Fund’s poor performance in 2008, 150,000 public employee retirees are likely see their pension benefits cut by about 2.5% to 3%.

For some 30,000 retirees with holdings in the Variable Fund, however, the future outlook is even worse. Unlike the Core Fund, there is no limit to how much payments in the Variable Fund can decline. When final adjustments are announced May 1, retirees can expect a drastic reduction of 40% or more in the Variable Fund portion of their account, according to the Wisconsin Department of Employee Trust Funds.

Wisconsin is far from alone in its pension-fund woes. California, Kentucky, Rhode Island, New York and Missouri are among a number of states reporting an estimated $865 billion in pension-fund losses. And the news couldn’t come at a worse time, with state budget shortfalls totaling an incredible $40 billion.

According to the Center for Retirement Research, assets for 109 state pension funds declined 37% to $1.46 trillion as of Dec. 16. The situation has become so dire that many states could be forced to cut back on pension benefits for newly hired employees.

The state of Kentucky is already moving in that direction. Lawmakers there have proposed a pension reform plan that puts the state’s first minimum retirement age at 57 for workers hired after Sept. 1. The plan also requires 30 years of service - an increase from 27 - to receive full benefits.

As reported Jan. 13 by Bloomberg, Kentucky’s largest fund for state workers held about 52% of the assets needed to pay current and future benefits to its 117,000 members as of June 30. At the time, the plan had an unfunded liability of $4.8 billion, while the entire system’s liabilities totaled approximately $16 billion.

Despite watching billions of dollars disintegrate, many public pension fund managers say they intend to stay the course and keep their current investment strategies intact. As for plan participants, they may have a different opinion. In Wisconsin, participants are pulling out of the riskier Variable Fund portion of that state’s pension plan. As of January, more than 1,700 participants instructed the state to move their money out of the Variable Fund or quit making contributions to the all-stock fund. The last time that happened was in 2002.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Like municipal and state pension funds, corporate pension funds across the country are reeling from the effects of the economic downturn. Now, some businesses, including Pfizer Inc., International Business Machines Corp., United Parcel Service and others are taking their case to Capitol Hill, pleading before lawmakers to suspend a federal rule that requires them to infuse billions of dollars into company retirement plans in order to make up for this year’s massive losses in the stock market.

Skeptics, however, aren’t buying the latest outcry from Corporate America. As reported Dec. 8 on Bloomberg, some financial experts believe corporations simply are using the current financial crisis as an easy scapegoat to bypass a 2006 law that mandates increased retirement-funding provisions.

Others contend many pension fund money managers took far too many risks regarding certain investments, and funds that stuck with prudent and conservative investment strategies were better able to mitigate major market losses.

“This is a failure of risk management by America’s pension plans,” said Jeremy Gold, founder of Jeremy Gold Pensions, a New York-based actuarial consulting firm, in the Bloomberg article.

“They failed to reduce their exposure to the equities markets, they continued to gamble, and they lost the gamble,” he said. “So like all the other losers, they’re standing on the Capitol Hill steps, saying ‘Help!’”

Gold has a point. Market forces aside, the success of a pension fund is contingent on the entities managing the fund’s assets. As more pension fund losses come to light, it’s apparent that some of this work has been severely flawed - from inappropriate bets on risky investments such as collateral debt obligations to the methods used to determine the value of a fund’s assets.

New Funding Levels

Compounding the problems for pension funds is the Pension Protection Act of 2006, which dictates new minimum funding standards for pension funds. By the end of this year, the funding level will be 92%. By 2011, it goes up to 100%. For companies that fail to reach the required funding threshold in any given year, a stiff penalty will be imposed. Pension plans that enter an “endangered status,” meaning they fall below an 80% funding level, face even tougher sanctions, including the possibility of immediate lump-sum payments.

A recent analysis by the consulting firm Mercer LLC shows that some 800 companies in Standard & Poor’s 1500 Index have pension funds. Collectively, the companies were nearly $300 billion short of the funds needed to pay projected benefits as of Nov. 30. By comparison, the same funds started out 2008 with an estimated $60 billion surplus.

“Some companies have already taken steps to address pension plan financial risk by modifying their investment and contribution strategies,” says Adrian Hartshorn of Mercer’s Financial Strategy Group. “However, many companies have not yet addressed the issue, or the steps taken to date have proved inadequate in the current market conditions.

“Changes in the value of pension plan liabilities not matched by changes in the value of plan assets will result in pension plan surpluses or deficits,” he adds. “If companies are unable to tolerate the impact of the changing financial position of the plan, company management needs to manage the risk, much as it would manage any other risk in the business,” Hartshorn says.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.