THE GREAT NEST EGG ROBBERIES
- Part II -
Sightings from The Catbird Seat
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... Continued from Part I
If you and your family are one of the millions of the everyday people in the world who are lucky enough to be able to set aside a little of your sweat-of-the-brow earnings in a bank savings account or a cash-value life insurance policy, or maybe have a retirement plan at your place of work, you may be interested in seeing what some of today’s well-known and trusted ‘VULTURE CAPITALISTS’ are doing with YOUR FAMILY’S NEST EGGS!
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Alan Bond - Pension plan manager indicted for fraud.
December 17, 2000
FUNDS MANAGER INDICTED
Manager Used Kickbacks to Fund a Lavish Life
By Larry Neumeister, Associated Press
NEW YORK (AP) — A pension fund manager took nearly $7 million in kickbacks and spent the money on a lavish lifestyle that included 75 cars, multiple homes and huge credit card bills, authorities say.
Alan Bond, 38, president and chief investment officer of Albriond Capital Management, allegedly used his control of client accounts to misdirect millions of dollars in business, according to an indictment unsealed in U.S. District Court in Manhattan.
He allegedly steered business to brokers and took the money from commissions paid to them. The scheme involved about 25 clients, including the NBA Players’ Pension Plan, the government alleged Thursday.
“The Victims are Human’’
“Although Mr. Bond’’s clients were mostly pension funds, the victims are human,” said Valerie Caproni, a regional director for the Securities and Exchange Commission.
“Mr. Bond’s scheme affected the life savings and financial security of thousands of working people such as police officers, firefighters, teachers and bus drivers,” she said.
Bond is a frequent guest on the PBS program, “Wall Street Week with Louis Rukeyser.” His lawyer, John Siffert, said his client would plead innocent, and added, “We expect that he will be vindicated.”
If convicted of charges that include conspiracy and fraud, Bond could face five years in jail on each of 11 counts.
Caproni said Bond managed more than $600 million for his clients, most of them union and government pension funds.
Between 1993 and 1998, Bond benefited illegally with help from Robert I. Spruill, a former securities broker with three companies who was charged by prosecutors with conspiracy and fraud, court papers say.
In turn, federal authorities say, Bond built an opulent lifestyle which included dozens of luxury and antique automobiles, a large home and beachfront condominium in Florida and frequent shopping sprees. His American Express bills ranged from $200,000 to $470,000 a month, authorities said.
Spruill, 52, and others allegedly caused a substantial portion of commission revenues from Bond’s clients to be funneled to Bond through payments to his credit cards and bank accounts.
Spruill pleaded innocent on Thursday and was released. He could face up to five years in prison on each of two counts.
Both men could also face substantial fines.
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January 13, 2001
Bureau of Workers' Compensation to take $30 million out of funds managed by man facing fraud charges
BY Jon Craig, Akron Beakon Journal
COLUMBUS: About $30 million is being reinvested this week by the Ohio Bureau of Workers' Compensation, prompted by a federal investigation of a Wall Street broker.
Fund manager Alan Brian Bond, 38, of New Jersey, was charged with fraud last month in a kickback scheme involving 25 pension funds worth $600 million. The Securities and Exchange Commission said the fraud occurred between 1993 to 1998.
While no fraud or losses are alleged in the $18 billion workers' compensation fund, spokesman Jim Samuel said the bureau does not want its investments to make up more than 15 percent of Bond's total client base.
``We're going to keep a close watch on him,'' Samuel said yesterday. Albriond Capital Management LLC, a new company formed by Bond in 1998, was handling about $80 million in workers' compensation investments until Friday. The bureau was pleased with Bond's performance last year, Samuel said. Even so, Samuel said the bureau began shifting money away from Albriond this week and is shopping around for alternative investments because of the diminishing pool of clients now handled by Albriond.
The bureau invests about $1.5 billion with minority money managers, including Bond. Samuel said the $30 million will be spread among the best performing minority-owned investment firms.
In a complaint filed Dec. 16, the SEC claims that Bond's former company -- Bond, Procope Capital Management -- may have mishandled investments by the State Highway Patrol Retirement System and Ohio Police & Fire Disability Pension Fund....
Allegations of kickbacks
In its complaint, the SEC alleges that a State Highway Patrol board member received at least $79,000 in kickbacks from a dummy corporation called Satchmo Inc. Hyatt declined to name the board member.
Sgt. Gary Lewis said the patrol has been assured by the SEC that no past or current patrol officer on the retirement board is suspected of wrongdoing....
Aloha Airlines - Bankrupted Hawaii-based airline.
February 23, 2006
Aloha's pension dealings probed
By Rick Daysog, Advertiser Staff Writer
The U.S. Department of Labor is investigating whether Aloha Airlines used employee pension funds to pay its bank loans.
Under federal law, an employer is barred from using workers' pension money to pay for the company's business expenses, including bank loans. Pension money must be used to pay for employee benefits designated by the retirement plans.
Aloha declined to comment on the investigation. The state's second largest airline emerged from bankruptcy last week. The investigation involves events before the bankruptcy when the airline was headed by former CEO Glenn Zander.
The Labor Department's investigation centers on the 2,400-member machinists union's defined-benefit plan.
The federal agency earlier this month subpoenaed First Hawaiian Bank, asking for loan records, investment agreements and other financial records relating to Aloha's management of machinists union pension.
The Labor Department said, in a copy of a subpoena obtained by The Advertiser, that it is requesting similar records from the Bank of Hawaii, American Savings Bank and Central Pacific Bank.
In a Feb. 3 letter accompanying First Hawaiian Bank's subpoena, Labor Department Deputy Regional Director Crisanta Johnson said the department is looking into possible violations of federal labor laws involving the management of the machinists union pension....
"This office is conducting an investigation of the above referenced employee benefit plan ... to determine whether any person has violated or is about to violate" federal law, wrote Johnson, who is based in the Labor Department's office in Pasadena, Calif.
First Hawaiian Bank spokesman Brandt Farias declined to comment, saying the company doesn't discuss pending investigations or customer matters. Bank of Hawaii, American Savings and Central Pacific also had no comment.
The four banks were part of a team of local lenders that provided financing for Aloha.
Aloha's management of its employees' pensions has been a major source of controversy for the local carrier during its 13-month bankruptcy.
As part of its cost-cutting measures taken during bankruptcy, Aloha decided to terminate defined pension benefits for about 3,000 of its union and nonunion employees. The decision was opposed by the airline's union members and the federal Pension Benefit Guaranty Corp., delaying the airline's emergence from bankruptcy for several months.
The airline eventually settled with the unions and the PBGC, allowing it to jettison the pensions.
The Labor Department's probe follows concerns raised during Aloha's bankruptcy proceedings by the carrier's smaller creditors.
The airline's unsecured creditors committee had been looking into the use of airline employee pension money to acquire Aloha stock issued several years ago by the airline. Proceeds from the stock sale went to the airline, which the committee said was used to pay bank loans.
The pension was left with Aloha stock, which became worthless during the bankruptcy.
In bankruptcy court filings, the creditors committee said it was considering suing one or more of Aloha's lenders, but the dispute was settled out of court just as the airline was exiting bankruptcy.
The terms of the settlement were sealed by federal Bankruptcy Judge Robert Faris.
The Labor Department's subpoena said its investigation is being handled by its Employee Benefits Security Administration division, which investigates misuse and mismanagement of pension and health plans run by private employers.
The division oversees about 730,000 pension plans and another 6 million health and welfare plans and investigates about 4,000 pension plans each year.
For more, GO TO > > > Aloha Airlines: Flying with the Bankruptcy Buzzards
Alliance Capital - The number one owner of Enron stock at the time of their collapse.
From “Enron Exposed!”, by American Media Specials, Inc.: . . .
LIFE SAVINGS LOST
How millions of innocent Americans lost their life savings
. . . As for your IRA and 401k, hopefully you or your portfolio manager diversified your pension portfolio so that any one stock didn’t make up more than 5 percent of the total. For those who didn’t and owned a chunk of Enron, the losses can be catastrophic.
Donald Nast, chairman of the finance department at Florida State University told AMI: “The Enron disaster has brought to light a number of problems, not the least of which is diversification of investments. If you don’t, you’re setting yourself up for a real disaster.”
Nast also is chairman of Florida pension fund, which lost a whopping $335 million on Enron. That gives Florida the dubious distinction of suffering the biggest loss of any government fund in the country....
The Florida pension money was being managed by Al Harrison of Alliance Capital.
Harrison, who prior to the Enron debacle had a stellar record of success, continued to purchase Enron stock as it was plummeting last October and November.
One question being asked is whether Frank Savage, who is on the board of directors of both Enron and Alliance Capital, influenced Harrison’s decisions. The situation is under investigation by Florida’s attorney general.
Florida state Rep. Mark Flanagan, who chairs a committee investigating the losses, told The New York Times: “Even the little old lady in Pasadena knew Enron was in trouble. Every other investment manager was bailing out. He heard the same bad news. Yet he continued to buy. We don’t have a good explanation why.”
Michael O’Keefe, a member of the Board of Regents Finance Committee of the University of Minnesota, may have the answer to why Harrison continued to buy Enron. The University of Minnesota’s endowment, which was managed by Alliance, lost $5 million in Enron.
O’Keefe provided AMI with a tape recording of Al Harrison explaining to the committee that up until just six days before Enron declared bankruptcy, Kenneth Lay assured him that everything was going to be fine....
For more, GO TO > > > The Story of Enron
Apollo Advisors - Financial investment managers. 13th largest campaign contributor to Senator Joseph Lieberman (D-CT), Al Gore’s vice presidential running mate, and a client of lobbying firm Akin, Gump, Strauss, Hauer & Feld.
Another of Akin, Gump’s clients is Miller & Chavalier, a Washington, D.C.-based law firm which, together with PricewaterhouseCoopers, drafted the multi-million dollar IRS settlement agreement for Hawaii’s Kamehameha Schools.
Apollo Advisors has another connection with Kamehameha Schools: Along with National Housing Corp (which was involved in an alleged kick-back scheme with ousted Bishop Estate trustees Henry Peters and Richard Wong), Apollo has financial interests in several estate owned properties involving two alleged Yakuza-connected companies: Azabu Building Company and Mitsui Trust.
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From Hoovers On-Line: Apollo Advisors earned its reputation as a vulture investor by specializing in distressed assets (junk bonds, troubled companies, real estate).
Leon Black, the former Drexel Burnham Lambert mergers and acquisitions chief, and a dozen other Drexel refugees founded the group, which invested in former Drexel clients after that firm's collapse -- notably the $3 billion junk bond portfolio of failed California insurer Executive Life.
Apollo has invested billions from four funds and has launched a fifth fund aimed at raising some $4 billion.
Apollo is linked with the Artemis group of investment holdings controlled by French billionaire François Pinault; the relationship dates back to the downfall of Executive Life.
For more, GO TO > > > Apollo Advisors
Arkansas Development and Finance Administration (ADFA) - From The Secret Life of Bill Clinton: . . . In 1989 the Arkansas Committee started investigating the alleged nexus of drug-running, money-laundering, and covert activities linked to Mena Airport.
The Arkansas Committee’s lead advocate, Mark Swaney, came to suspect that (Dan) Lasater and others were laundering funds through the Arkansas Development and Finance Administration (ADFA), a state-controlled investment bank created by Governor Clinton in 1985 to provide “low interest finance for economic development.” . . .
There was no need for Clinton to create ADFA. The state already had the Arkansas Housing Development Agency and the Arkansas Industrial Development Corp (later made famous by a clerk named Paula Corbin Jones)....
ADFA gave Clinton a patronage machine that answered to the Governor alone....
As James Ring Adams reported in The American Spectator, it was designed with the help of a Boston consultant named Belden Daniels and allowed Clinton to tap into the huge reserves of the Arkansas Teachers Retirement System. At the same time, Clinton steered bond business to Lasater, and low interest industrial loans to the others in the Arkansas group — Seth Ward, for instance, the father-in-law of Webster Hubbel — frequently without due diligence and over the objections of the agency staff.
“They were giving money away like candy to the insiders,” said Mark Swaney.....
Funds had been flowing offshore.
ADFA had done at least $250 million worth of business with the Fuji Bank, Grand Cayman Branch . . . It was a nice piece of arbitrage profiteering. . . . Whether the money...came back from Grand Cayman is anybody’s guess.....
In 1987 ADFA borrowed $5.04 million from Japan’s Sanwa Bank to buy stock in a Barbados company called Coral Reinsurance....
The activities of Coral Reinsurance triggered an investigation by the Delaware Insurance Department in 1992, which caused panic at ADFA....
Swaney believes that ADFA was created by Clinton as an instrument for Dan Lasater. What we know is that Lasater wrote at least eight letters to Bill Clinton recommending people for the board of ADFA. Most of them were appointed....
For more, GO TO > > > AIG: The Un-American Insurance Group
Arkansas State Teachers’ Fund - From: The Progressive Review - Clinton Scandal Clips Part 15:
PENSION FUND INVESTS IN CHINA - The Clinton crowd, which almost caused a disaster in the Arkansas state pension fund in the mid-1980s by its risky investments, is at it again according to Investor’s Business Daily and the American Spectator.
The Arkansas State Teachers’ Fund has put large sums into four companies with strong links to Chinese intelligence and the People’s Liberation Army, including the China Ocean Shipping Co., China North Industries, China Resources Enterprises and China Travel.
Some of these firms are also linked to Indonesian Clinton crony Mochtar Riady. The system owns nearly $2 million worth of stock in a COSCO subsidiary.
Says Charles Altmon of the highly rated Growth Stock Outlook newsletter ... the pension fund investments are “downright foolish.”
For more, GO TO > > > AIG: The Un-American Insurance Group
Ashland Inc. - One of the nation’s most politically-powerful power companies.
February 1, 2002
Concerns rise as Ashland OKs auditor
By Roy Wood, Cincinnati Post
Concerns heightened by the Enron collapse emerged Thursday as Ashland Inc. shareholders confirmed Ernst & Young as the company's independent auditor for fiscal 2002.
Ninety-nine percent of shareholders voted to ratify Ernst & Young at the Covington-based company's annual meeting, but one noted that the federal government has talked of limiting how long auditing firms can serve as corporations' independent auditors.
The issue has been discussed in Washington in years past but never acted upon. It has regained prominence in the wake of the Enron bankruptcy, in which outside auditors apparently didn't question an accounting plan designed to hide debt.
Ernst & Young has served as Ashland's outside independent auditor since Ashland Inc. became a public company in 1936.
Ashland Chairman and CEO Paul W. Chellgren said Ashland executives weighed the question of ratifying Ernst & Young, discussing the issue as late as Wednesday.
''We felt that the benefit of continuity far outweighed the turbulence, and frankly the additional expense of changing auditors,'' Chellgren said.
''Ernst & Young has very specific procedures of rotating their audit partners. We felt that provides adequate independence and separation from the company.''
Ashland contracts with Ernst & Young only for auditing, tax planning and financial planning and consulting, not for any non-financial management consulting, he said.
Ashland officials also said the company's tax-deferred retirement savings plan has only 11 percent of its assets restricted in Ashland stock, another issue that arose after the Enron failure left thousands of Enron employees with devalued retirement plans....
Shareholders re-elected four directors: Frank C. Carlucci, James B. Farley, Dr. Bernadine P. Healy, and William L. Rouse.
Healy is the former president of the American Red Cross, and Carlucci is chairman of The Carlyle Group in Washington, D.C. Farley is the retired chairman and CEO of The MONY Group, and Rouse is the former chairman of First Security Corp.
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August 29, 2002
Suit Charges Ashland Mismanagement
Associated Press
Ashland Inc.’s former president is responsible for accounting improprieties, securities fraud, environmental crimes and the mishandling of corporate acquisitions, a shareholder contends in a lawsuit.
The actions have eroded the company’s stock value, according to the suit filed in Covington, Ky., on Aug. 16 by Central Laborers’ Pension Fund, a shareholder. It names former president, Paul Chellgren, Ashland’s board of directors and several senior officers plus the company’s accounting and auditing firm, Ernst and Young.
The fund is asking a Kenton Circuit Court judge to award an unspecified amount that would include punitive damages....
Chellgren retired this month after violating the company’s policy against office romances.
Les Zuke, spokesman for Ernst & Young, said the lawsuit “has no merit. We are confident our work was in accordance with professional standards.”
Cheligren’s mismanagement of the company and control over its directors has devastated the company and its image, the suit contends.
“Because of his domination and control over Ashland, Chellgren operates Ashland as a private fiefdom, despite its public ownership and through a combination of abuse and his control over Ashland, waste of its assets, gross mismanagement and active and deliberate dishonesty, has severely damaged what was once a valuable and profitable corporate franchise – without answering to anyone,” the suit alleges.
The lawsuit contends that Chellgren, the directors and other officers “watched Ashland’s stock price free-fall from over $55 in mid-1998 to below $32 in late 1999.”...
The lawsuit says that from 1999 to 2001, the company resorted to “creative accounting,” overstating revenues by $18 million and understating costs associated with Superfos deal and ongoing operations at APAC, a paving company Ashland owns.
Ashland, which is headquartered in Covington, reported that APAC had an operating loss of $38 million, due in part to a $15 million charge stemming from overstated earnings at APAC’s Manassas, Va., unit.
The company later took an additional $3 million charge as a result of an internal investigation....
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For more on Ashland, Inc., GO TO > > > Birds on the Power Lines
For more on Frank Carlucci and the Carlyle Group, GO TO > > > Birds that Drink from Cesspools
For more on Bernadine Healy and the American Red Cross, GO TO > > > The American Red Double-Cross
Bentley Financial Services - Pennsylvania financial services firm.
December 21, 2001:
Financial firm in Pennsylvania placed in receivership
by Jim Jordan, Lexington Herald-Leader
A Pennsylvania firm that invested more than $4 billion for 3,200 banks, credit unions, non-profit groups and individuals since 1986, including credit unions in Kentucky, has been placed in receivership by a Philadelphia judge.
Bentley Financial Services and its founder, Robert L. Bentley, are accused of fraud and securities violations, but not of losing or stealing investors’ money.
“What we are being told (by state and federal regulators) – is that no assets will be lost,” said Piper Swanson, manager of Metro Employees Credit Union in Lexington....
On Oct. 23, the U.S. Securities and Exchange Commission filed a lawsuit in Philadelphia that accused Bentley of selling uninsured “privately issued notes” to investors by telling them the notes were actually federally insured.
What Bentley was doing, the SEC alleged, was buying long-term CDs from banks and then selling a portion of each CD, represented by an uninsured note, to investors at a lower interest rate than Bentley was receiving on the long-term CD....
California Public Employees’ Retirement System (CalPERS) - The nation’s largest public pension fund with over $175 BILLION in trust assets (the last time I counted).
Like other states that have accumulated large amounts of money in their employees’ pension plans, this state’s huge pension fund provides a tremendous feeding ground that the power elite find irresistible. Usually the feeding frenzy is done under cover of darkness so that the prey is not aware of what is happening. Once in a while, however, one of the predators is exposed and we can get a glimpse of what financial carnage is taking place.
In 1997, CalPERS invested $100 million with Hicks, Muse, Tate & Furst, an investment partnership with close relationships with George Bush and George W. Bush, Jr., after a recommendation was made by an outside consultant, Christopher J. Bower.
A second $100 million investment was approved after less than two years. It was later discovered that Tom Hicks, the founder of Hicks, Muse, had purchased a yacht from Bower for $300,000. This price was $45,000 more than Bower had originally paid for the used boat, and Hicks had made the purchase without ever seeing the vessel.
The pension fund’s lawyers ruled that there was no serious conflict of interest in the purchase.
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May 26, 2002
CalPERS invested $700 million
with Davis donor
Billionaire also made contributions to pension board members
Lance Williams, San Francisco Chronicle
The California Public Employees Pension System steered $700 million in investment capital to a wealthy financier who has donated more than $600,000 to Gov. Gray Davis and thousands more to officials who serve on the CalPERS board, according to state records.
According to the records, in the past year the CalPERS board has twice voted to make multimillion-dollar cash infusions in venture capital funds controlled by billionaire financier and supermarket magnate Ron Burkle of Los Angeles.
He is a heavy-hitting political donor with close ties to Davis and other top Democrats, including CalPERS board members San Francisco Mayor Willie Brown and state Treasurer Phil Angelides.
Since 1998, Burkle has donated $609,000 to Davis' gubernatorial campaigns, and last year his Golden States Foods firm hired Davis' wife to serve on its board of directors.
The governor controls four appointments to the 13-member CalPERS board, but a spokesman said Davis plays no role in CalPERS investment decisions.
A CalPERS spokeswoman said the investments in Burkle's concerns were thoroughly vetted and made on the merits. Brown and Angelides acted legally in voting for the Burkle investments, said the spokeswoman, Patricia Macht.
But James Knox, chairman of the reform group California Common Cause, said the affair was troubling on clean-government grounds.
He contended that Brown and Angelides should have recused themselves rather than vote on the Burkle investments because they had obtained donations from him. And Knox said the scenario of a major donor seeking investment funds from CalPERS was "a concern because it puts the governor's appointees in a position where they can show favor to a major campaign contributor."
Charlie Oates, who publishes an independent newsletter for CalPERS pensioners, said the board should pursue more conventional investments and steer clear of investments involving their political benefactors.
"It's a public pension trust fund for the benefit of the members of the system and not for the benefit of the politicians," he said. "As trustees, they should be more concerned with running the trust and taking care of the beneficiaries."
Roger Salazar, Davis' spokesman, said the criticism was unfair....
Burkle is a self-made billionaire who rose from grocery store clerk to owner of the Ralph's/Food 4 Less chain. Today he lives in Greenacres, a Beverly Hills estate once owned by silent film star Harold Lloyd, and is CEO of the Yucaipa Companies investment concern.
Burkle is a longtime Democratic activist, and since 1998 he has donated $1.9 million to Democratic candidates and causes in California, state records show. Davis is his single biggest beneficiary.
According to Yucaipa spokesman Ari Swiller, the financier's friendship with Davis goes back 20 years, to the days when Burkle was a supermarket owner and Davis was an assemblyman pushing the idea of putting photos of abducted children on milk cartons....
They share other connections as well. Swiller, Yucaipa's spokesman, also serves as Davis' campaign treasurer. Davis' wife, Sharon, helped run Burkle's charitable foundation in the 1990s, and last year she went on the board of Golden State Foods, a Yucaipa-owned firm.
Burkle also has a long-standing connection to Mayor Brown, whom Davis appointed to the CalPERS board. From 1993 through 1995, while Brown was speaker of the Assembly, he moonlighted as a lawyer for Burkle's Food 4 Less chain, earning more than $30,000, state records show. Burkle's companies also donated $59,000 to his legislative campaigns.
After Brown became mayor of San Francisco, Burkle donated $100,000 to help underwrite the 1997 U.S. Conference of Mayors meeting in San Francisco.
The billionaire also became involved in efforts to redevelop Treasure Island in San Francisco. In 1999, a firm backed by Burkle and headed by Darius Anderson, a Sacramento lobbyist who has worked as a fund-raiser for both the governor and Brown, was chosen by the mayor's office to develop a marina at Treasure Island.
More recently, the Burkle-Anderson firm became part of a consortium that is angling for rights to develop the entire 550-acre base.
In recent years Burkle has also donated $50,000 to Angelides, who as state treasurer is an ex-officio CalPERS board member, state records show.
Swiller, Burkle's spokesman, said the financier supports Davis, Brown and Angelides because he likes them personally and agrees with their ideas. Burkle keeps politics and business separate, he said: "We have a good track record in business, and pride ourselves on supporting candidates and causes we like."
CalPERS records show that Burkle's Yucaipa Corporate Initiative Fund obtained $200 million in investment capital via what the pension fund styled its "California initiative."
That strategy, announced in June 2000, is intended to boost economic development by pumping funds into what it called "underserved" areas, including rural and inner-city areas.
CalPERS consultants and staff reviewed more than 60 investment proposals, and finally recommended 11 investment firms, the records show.
In May 2001, the board unanimously approved the plan. Yucaipa's $200 million share was quadruple what any of the other firms obtained, the records show.
While the matter was pending, state records show Burkle hosted a fund- raiser for Davis and donated $20,000 to his campaign. He also donated $25,000 to Angelides, and made a series of other political donations, including $100, 000 to the state Democratic Party.
After Yucaipa obtained the $200 million investment, the firm pitched CalPERS on backing the Yucaipa America Fund, an investment fund that proposed to tap labor union pension funds for a venture capital fund.
Macht, the CalPERS spokeswoman, said CalPERS staff reviewed the idea and became convinced that the pension fund could make a good return by "getting in on the ground floor" of the venture.
In November, at a closed meeting, the CalPERS board voted to commit $500 million to the fund.
While that matter was pending, state records show Burkle hosted two more fund-raisers for Davis and donated $50,000 to his campaign. Less than three weeks after the vote, Burkle also hosted a fund-raiser for Angelides.
Macht said that in both Burkle investments the CalPERS staff had negotiated excellent terms to protect pensioners' investment and maximize return. No one in the governor's office ever contacted CalPERS staff about either matter, she said.
The $150 billion CalPERS pension fund is run by a 13-member board of state officials and representatives of pensioners and other interested groups.
Controversy over political donations has occasionally roiled CalPERS. In 1998, CalPERS voted to bar board members from obtaining political donations from firms that sought or were doing business with the pension fund.
The action came after the Los Angeles Times reported that state Controller Kathleen Connell and then-state Treasurer Matt Fong had obtained $400,000 in political donations from CalPERS contractors. Connell denied wrongdoing and successfully sued to overturn the ban, which is no longer in effect.
Earlier this month, the co-founder of a vineyard development firm that had recently obtained a $100 million investment from CalPERS hosted a $2,500-per- head political fund-raiser for Davis in San Francisco.
Backers of GOP gubernatorial candidate Bill Simon accused Davis of using CalPERS to raise funds for his re-election drive, but Davis and Richard Wollack, co-CEO of Premier Pacific Vineyards, said there was no connection between the investment and the fund-raiser...
For another Ron Burkle investment, GO TO > > > Aloha Airlines
$ $ $
January 31, 2003
Bias Case Costs California
Retirement System $250 Million
Associated Press
SAN FRANCISCO - California’s state retirement system has agreed to pay a record $250 million to firefighters, police and other law-enforcement officers to settle allegations they were shortchanged on disability benefits because of their age.
The settlement in the age discrimination case was approved Wednesday by a federal judge. It is the biggest settlement of a single lawsuit in the history of the U.S. Equal Employment Opportunity Commission, the federal agency said yesterday.
“We hope that the resolution of this case will cause employers everywhere to review their business practices and to make absolutely sure that they do not discriminate on the basis of age,” said Susan McDuffie, director of the federal agency’s San Francisco district....
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Calpers To Buy Stake In Carlyle
By Albert B. Crenshaw,
Washington Post Staff Writer
February 2, 2001
The California Public Employees' Retirement System, the nation's largest public pension fund, has agreed to buy a stake in Carlyle Group Inc., a District-based private equity-management firm noted for its investment success and its ties to prominent former government officials.
The deal would bring as much as $850 million in Calpers money to Carlyle —— $175 million for about a 5 percent ownership interest, $250 million to be invested in new Carlyle funds, and an option to invest another $425 million over two years.
Carlyle officials said the price indicates the firm is worth about $3.5 billion, which would make it the most valuable private equity firm in the world.
Private equity funds generally take investment money from pension funds, endowments and wealthy individuals and try to obtain high returns by buying into promising start-ups or undervalued companies.
Carlyle, founded in 1987, now has $13 billion under management, making it the largest private equity firm in the world, a firm official said.
Last fall, for example, Carlyle made a large investment in a Korean bank and sold a local federal contractor. It sold Federal Data Corp. of Bethesda for $302 million in cash and assumed debt, after buying it in 1995 for a sum described as "under $100 million."
Former president George Bush is an adviser to Carlyle's Asia fund; former secretary of state James A. Baker III, former defense secretary Frank C. Carlucci and former Carter administration policy adviser David Rubinstein are partners in the firm.
Calpers has made several similar investments recently, but the Carlyle deal is its largest.
Pension experts said it remains somewhat unusual for a pension fund to buy into a private equity firm. That's because these firms' investments can be risky compared to many pension fund holdings, and valuations of successful ones can be high.
Pension funds give money to money managers who may place some of it in such investments, "but that is sort of one layer removed," said Jeff Nipp of Watson Wyatt Worldwide, a benefits consulting firm. On the other hand, he added, "Calpers being as big as they are, they do almost everything."
Calpers has committed about $16 billion of its $168 billion in assets to private equity funds, according to a pension fund official....
The Calpers investment will benefit Carlyle on two fronts, officials at the firm said. First, private equity firms generally put their partners' money into their investment funds, both to benefit from any investment success and to reassure outside investors. Carlyle now has committed $350 million of its partners' money to its funds and Calpers will allow it to expand its investment reach. In addition, the Calpers money will "anchor" the investments in new funds, a Carlyle official said.
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Honolulu Star-Bulletin, 3/11/97:
Nomura Scandal ... Nomura Securities revealed last week that two managing directors improperly channeled trading profits to select clients. Those clients have been linked to “sokaiya” organized crime groups by NHK public television and the Nihon Keizai newspaper....
The California pension fund, known as Calpers, said it will review its $724 million fund-management contract with Nomura Capital....
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Honolulu Star-Bulletin, 3/18/97:
California Pension Fund Dropping Nomura – The California Public Employees Retirement System, the nation’s largest public pension fund, said it will cease dealing with Japan’s scandal-plagued Nomura Securities Co. The $110 billion pension fund, known as CalPERS, also said it will begin to manage more of its own domestic funds rather than rely on outside managers.
Nomura has been tainted by alleged illegal stock transactions on behalf of a racketeering group.
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March 18, 2002
Calpers targets 7 firms to manage domestic stocks
Reuters
SACRAMENTO, Calif. - U.S. pension giant CalPERS on Monday approved a short list of seven firms to oversee part of its U.S. equity portfolio after most of its current managers failed to meet the $150-billion fund's return targets.
The investment committee of the California Public Employees' Retirement System, or CalPERS, voted to approve a staff recommendation to solicit outside fund management companies that would be responsible for some $4.1 billion of the $8.7 billion that comprises the active domestic equity portfolio.
The fund's investment committee also voted to retain State Street Global Advisors to manage CalPERS' nearly $18 billion international equity index portfolio.
Brad Pacheco, a CalPERS spokesman, said the decision on which firms to hire will probably be made next month. He said he had no numbers detailing the performances of the five current domestic equity fund managers, who have been on board since 1998.
"The investment committee has narrowed it down to seven people they are going to tap to see if they are interested in becoming our fund managers," Pacheco said.
The firms in the running to manage the domestic stock portfolio included: Aeltus Investment Management, Fifth Third Bancorp.'s (FITB) Fifth Third Bank, Franklin Templeton Institutional, Goldman Sachs Group Inc.'s (GS) Goldman Sachs Asset Management, Amvescap Plc's Invesco, New Amsterdam Partners and Trust Company of the West.
The search comes after the $150-billion fund posted its worst loss in at least 17 years as CalPERS saw a 7.2 percent slide in the total value of its assets for the fiscal year ended June 30.
That marked the worst overall return since at least fiscal year 1984, when investments fell 3.1 per cent.
According to the staff recommendation on the CalPERS Web site, part of the reason for changing the domestic stock managers was that four of the five of the current fund managers have failed to meet the pension fund's return objectives.
© 2002 Reuters
See also: Carlyle Group; Nomura Securities; Turnstone Systems
Carlyle Group - A very politically-connected company.
From Hoover’s Company: . . . With former Defense Secretary Frank Carlucci as its chairman, it's no surprise that The Carlyle Group is drawn to defense firms....
Since Carlucci became chairman in 1987, the firm has brought in a host of staff from the Reagan and Bush administrations, including ex-Secretary of State James Baker and ex-budget chief Richard Darman (former President Bush and former British Prime Minister John Major have also made appearances for the firm). Partners include George Soros and the Mellon family....
For more, GO TO > > > Birds that Drink from Cesspools
Cendant Corporation - A marketing and franchising company whose holdings include Century 21, Ramada Hotels, Days Inn and Avis Car Rental.
CENDANT TO PAY $2.8 BILLION
FRAUD SETTLEMENT
Shareholder Suit Was One of Largest in U.S. History
NEW YORK (AP) Dec. 8, 1999 -- Cendant Corp., the marketing and franchising company battered by accounting problems last year, has agreed to pay $2.8 billion to settle a shareholder lawsuit accusing it of fraud.
The settlement, announced Tuesday and subject to approval by a New Jersey federal judge, would end one of the largest shareholder suits in U.S. history....
Accounting irregularities
Cendant, whose brands include Days Inn and Ramada hotels, the Avis car rental agency and real-estate brokerage Century 21, saw its stock price plummet last year after announcing the accounting irregularities, which forced the company to restate earnings from 1995 to mid-1998.
Cendant said CUC International, which merged with HFS Inc. to create Cendant in 1997, had used irregular accounting practices to inflate earnings by as much as $500 million over the previous three years.
The scandal prompted several resignations, and Cendant's market value dropped by $14 billion in a single session last April.
Pension funds sue
In June 1998, the accounting woes prompted a class-action suit filed by two major pension funds -- the California Public Employees' Retirement System and the New York State Common Retirement Fund -- on behalf of all shareholders. The plaintiffs accused Cendant of issuing false and misleading statements and allowing former company directors and officers to sell Cendant shares prior to the disclosures of the accounting problems....
Audit board established
It also requires Cendant to adopt a number of changes in the way it governs itself, including setting up an audit board comprised entirely of independent directors rather than company officials.
Meanwhile, Cendant is suing Ernst & Young LLP, the accounting firm that represented CUC. As part of Tuesday's settlement, shareholders will be eligible to receive 50 percent of any judgment against Ernst & Young.
* * *
From The New York Times, June 15, 2000: . . . Three former executives of CUC International (now Cendant Corporation) pleaded guilty to federal charges in what the authorities said was the largest and longest accounting fraud in history, continuing at least 12 years and costing investors $19 billion....
For more, GO TO > > > P-s-s-t, wanna buy a good audit?
Center Art Gallery - A former art store in Honolulu’s Ala Moana Shopping Center.
March 14, 2000
Center Art Gallery executives
guilty of embezzling
A U.S. judge decided that two Center Art Gallery officials
took $1.6 million from their workers' fund
By Debra Barayuga, Star-Bulletin
Two Center Art Gallery executives convicted in 1990 for passing off artworks were convicted again today. This time for stealing $1.6 million from two of the company's employee pension benefit plans.
William Mett and Marvin Wiseman face five years imprisonment on each of 12 counts charging them with conspiracy and embezzlement.
Visiting U.S. District Judge Edward Rafeedie from California found the two men guilty on all counts based on transcripts of the 1996 trial. A nonjury retrial yesterday consisted of only brief arguments by the government and attorneys for the defendants.
Mett, president of Center Art Galleries, and Wiseman, vice president, were accused in 1990 of withdrawing $1.6 million between March 1990 and November 1991 from pension plan accounts. Both were trustees of the benefit plans.
Mett and Wiseman were also found guilty of illegally serving as trustees of the pension fund . Mett was found guilty of filing false documents relating to the pension plan.
Sentencing is scheduled for June 26. The judge allowed the men to remain free on bail and gave their attorneys an extension to file appeals.
The government said the two violated their fiduciary duties and acted with criminal intent to deprive the plan of assets when they withdrew the money via 42 checks over a 20-month period.
Funds loans, defense says
The government alleged that the two used the money to keep the gallery operating, to pay their salaries from 1990 to 1992 and to pay attorneys to defend them.
Dennis Riordan, attorney for Mett, argued the defendants withdrew the money as loans and transferred it to the business with the full intention of paying it back.
In 1990, their actions were consistent with doing everything they could to keep the business afloat, fulfill their pension plan obligations and pay their lawyers, Riordan said.
In arguments filed in court, Riordan argued that the government failed to prove Mett knew the transfers were illegal....
Arthur Wachtel, attorney for Wiseman, argued the government failed to prove that his client acted with intent and should be acquitted.
Wiseman played a prominent role at Center Art Gallery by acquiring artwork and hiring employees but he was a "figurehead trustee," Wachtel said.
Wiseman had no ownership interest in the company and made no decisions regarding the administration of the pension plan, he said.
Mett was the one who administered the pension plan, signed the tax returns, hired the actuaries and authorized employee loans -- not Wiseman, he said.
No promissory notes issued
The defense also contends the government provided no evidence to prove Mett and Wiseman knew they had to resign as trustees after they were convicted in the art fraud.
In the government's closing statements filed in court yesterday, assistant U.S. Attorney Larry Tong argued that if the withdrawals were in fact loans, not one of the checks was documented by promissory notes. Defendants simply had the checks deposited into Center Art Gallery's account.
The purported loans also were not recorded until August 1994, almost three years after the pension plan accounts were depleted and when the government began investigating Center Art, Tong argued.
Mett and Wiseman were found guilty at their first trial in June 1997 and sentenced to about six years in prison. They appealed and the 9th U.S. Circuit Court of Appeals ordered a retrial reversing the conviction on the grounds that attorney Tom Foley had been improperly allowed to testify.
Foley had testified he advised the defendants that taking money from the plan and using it for the corporation was prohibited.
The government, at the first trial, had maintained that in spite of Foley's advice, Mett and Wiseman withdrew another $220,000 from the pension fund that was not used to pay retirement benefits, Tong said.
Mett and Wiseman served 36 months and 30 months in federal prison, respectively, for the mail and wire fraud.
The art fraud was exposed by Star-Bulletin writer Lee Catterall.
http://starbulletin.com/2000/03/14/news/story5.html
Central Pacific Bank - A Hawaii bank financially joined at the hip with Japan’s Sumitomo Bank.
From Pacific Business News, October 13, 1997: Central Pacific Bank is leading a group of 10 Taiwanese bankers to provide an $85 million construction loan for a Nauru Tower sister project.... This is the first substantial loan involving a Taiwan consortium and the largest since the Japanese-investment craze ended earlier this decade....
The loan is for Nauru Phosphate Royalties Development (Honolulu) Inc.’s construction of Hawa`iki Tower residential condominium near Ala Moana Center....
Central Pacific Bank, the fourth-largest bank in Hawaii with $1.4 billion in assets, is the co-lead lender for the loan. The other co-lead lender is International Commercial Bank of China....
A second Hawaii organization, Hawaii Carpenter’s Financial Security Fund, and a Mainland investor, Union Labor Life Insurance Co., are also part of the loan agreement.
Central Pacific Bank was introduced about a year ago to the Taiwanese bankers through an ally, Mellon Mortgage Co. of California, a firm with $14 billion in assets and relationships with lenders worldwide...
Nauru Trust was created in 1968 to administer certain trust funds for the citizens of the Republic of Nauru, a small phosphate-rich South Pacific island. The funds placed in the trust are primarily from a portion of the royalties payable to the republic for phosphate mining on the island...
For more, GO TO > > > Broken Trust
Cisco Systems - From Parish & Company, 9/22/00: CISCO SYSTEMS WATERED STOCK SCHEME ...
Microsoft erected a financial pyramid scheme, using employee stock options, designed to leverage growth in its stock price.
Cisco Systems’ competitive response ... involved using a merger scheme designed to leverage growth in its own share price.
What neither company anticipated was the impact of Citigroup, quietly using a merger scheme similar to Cisco’s, in addition to a variety of predatory practices designed to generate merger fees through its Salomon Smith Barney subsidiary.
While all eyes are on technology, Citigroup has effectively unplugged the new economy due to excessive mergers and their various peripheral implications, in addition to becoming a watered stock itself. This may represent the biggest untold story in the financial media and also the greatest overall risk to the stock market and economy.
No one doubts the remarkable transformation brought about by the Internet. It has ignited a whole new era of economic prosperity. With an 85% market share in routers Cisco has certainly seized this opportunity and seen its stock market value soar to half a trillion dollars....
Cisco Systems Becomes a Financial Pyramid
Cisco boasts that it will acquire 25 companies this year, many software related, by simply issuing more shares of stock that are never accounted for in the financial statements.
This is done by using what accountants call the ‘pooling technique’ for acquisitions. As with the excessive issuance of stock options to cover wage costs, no cash is required and such costs are not reflected in the financial statements. The only direct cost for pooling and options is a small amount of ink toner and paper used to print up new stock certificates....
Pooling, already outlawed in most countries, was scheduled to be repealed by the Securities and Exchange Commission in December. Cisco has since mounted a quiet and furious lobbying effort and already pushed the repeal back 6 months to June 2001....
In addition to pooling, Cisco Systems is also simultaneously issuing a large number of employee stock options instead of paying cash wages. The wage expense for the options exercised is not shown as a charge against the company’s earnings even though the company gets a full tax deduction for such wages. This explains why Cisco Systems no longer pays federal income tax, even though they report billions in profits....
The company has offloaded its entire tax burden to employees who, along with the retirement system, are being left with inflated shares....
For more, GO TO > > > Cisco Systems; Dirty Gold in Goldman Sachs; What Price Waterhouse?
Citigroup - Deadly pension-plan blood-sucker.
From The Washington Post, 2/5/01, by Kathleen Day:
REPORT FINDS WIDE MONEY-LAUNDERING.
The failure of U.S. banks and regulators to track transactions with foreign banks enables criminals to route billions of dollars from drug sales, Internet gambling, tax evasion or other illegal activities into the United States each year, a new Senate subcommittee report concludes....
For much more GO TO > > > Vampires in the City
Columbia/HCA - Columbia/HCA, together with its subsidiaries, operates hospitals and related health care entities. As of 6/99, they operated 204 hospitals and 81 outpatient surgery centers.
* * *
From the FBI, Salt Lake City web posting: Crime in a White-Collar World — . . . Recently, the Salt Lake City Division spearheaded the investigation of the Columbia HCA network of hospitals and healthcare providers. As a result of this operation, many key players, including a few high-level officials of Columbia, are under federal indictment for Medicare fraud.
* * *
From BLB&G Columbia/HCA web posting: . . . Bernstein Litowitz Berger & Grossmann LLP, acting for the benefit of the New York State Common Retirement Fund and the California Public Employees’ Retirement System (CalPERS) and 10 other institutional investors and individual plaintiffs, filed this derivative action on behalf of Columbia/HCA Healthcare Corp against members of the Board of Directors and former senior executives of the Company.
This derivative action seeks to hold the defendants responsible for subjecting Columbia to the largest health care fraud investigation in history, extensive nationwide litigation and potential massive fines and penalties. . . .
* * *
On 08/14/97, CNNfn reported: For Columbia/HCA Healthcare Corp., things are going from bad to worse: This time, the new chief executive and six other officials stand accused of illegal insider trading. . . .
A lawsuit filed late Wednesday by New York State Comptroller Carl McCall accuses newly named chairman Thomas Frist of selling 3.7 million shares of Columbia stock in 1996 and 1997 for $138 million. McCall filed the suit on behalf of the New York State Retirement Fund, which owns 2.4 million shares of Columbia stock. . . .
* * *
Before Columbia and HCA merged, George W. Bush supporter Richard Rainwater put in about $125,000 in Columbia and $15 million in HCA. On 11/17/97, the Columbia/HCA board approved an internal operating reorganization plan and Goldman Sachs assisted the company in its evaluation of restructuring alternatives. Hawaii’s giant charitable trust, Bishop Estate, became a major investor in Columbia/HCA.
* * *
From: Nurse Week/Health Week 05/10/99: . . . Fraud trial begins for four Columbia/HCA executives: Several years after its investigation started, the government is trying four executives of Columbia/HCA Healthcare Corp on charges they filed false healthcare claims in an attempt to cheat the government out of $2.8 million. . . .
The case, being heard in a Tampa, Fla., federal court, is the first to reach trial in the FBI’s largest healthcare investigation ever. . .
This trial is part of a larger fraud case against Columbia. That investigation has led to raids on Columbia facilities in several states and a management shakeup. The company also is facing a number of lawsuits, including seven whistle-blower fraud suits. . .
* * *
On 5/18/00, Columbia/HCA announced that it has reached a tentative agreement to pay the federal government $745 million to settle a billing fraud investigation involving Medicare and other federal programs. The civil settlement with the Justice Dept, which still needs to be approved by several other federal agencies, is far less than the $1 billion analysts had expected.
* * *
For much more on HCA and Treasury Secretary Bill Frist, GO TO > > > The Dissection of Fristy
Connecticut - From ctnow.com, 2/22/00, by Jon Lender:
Silvester Probe May Involve Millions
The state treasurer and attorney general want Connecticut taxpayers to recover the illicit proceeds of former state Treasurer Paul Silvester’s criminal conspiracy, now that federal prosecutors have begun trying to seize some of those funds....
Current Treasurer Denise Nappier and Atty Gen Richard Blumenthal wrote last week to U.S. Atty Stephen Robinson, whose office is conducting a corruption probe after obtaining guilty pleas to conspiracy and racketeering charges Sept 23 from Silvester and two others.
“As you know, the principal victims of the wrongdoing by Mr. Silvester and his criminal associates were the state of Connecticut and its taxpayers. We ask that any money or items of value seized or forfeited in connection with this investigation, to the extent permitted by law, be made available to the state of Connecticut....”
An underlying question in the Silvester scandal has always been: What will happen to the hundreds of thousands, and perhaps millions, of dollars in tainted assets involved?
The question surfaced Feb 2, when Robinson’s office filed a civil forfeiture complaint aimed at seizing $209,879 in kickback money that Silvester’s brother-in-law was holding for him when investigators snared them. The federal government would take that money if a judge approves.
* * *
Robinson’s office is working with the FBI and IRS in a criminal probe into multimillion-dollar pension-fund deals that Silvester made with investment companies as treasurer from mid-1997 to January 1999. Those companies paid millions in finder’s fees and other compensation to politically connected individuals and companies....
Prosecutors say Silvester demanded a kickback from as least one person whom he got an investment firm to pay a finder’s fee. Depending on what the federal investigation digs up, there could be additional defendants - with, potentially, thousands or millions of dollars worth of assets subject to seizure under federal laws....
* * *
From ctnow.com, 3/9/00, by Jon Lender: State Investment Panel Confronts Fallout From Silvester Scandal: The scandal surrounding ex-state Treasurer Paul J. Silvester continued to haunt the state employee pension program Wednesday.
Meeting in Hartford, the state’s Investment Advisory Council confronted issues involving three Silvester-hired firms that have come under federal investigation in recent months:
> a Windsor partnership referred by the governor;
> a Boston firm that entered consulting contracts with two Silvester associates;
> and an international investment firm involving former President Bush.
* * *
From “Enron Exposed!”, by American Media Specials, Inc.: . . .
The Connecticut State Pension Fund lost
$15 million in the Enron debacle.
* * *
For more, GO TO > > > A Connecticut Yankee in King Kamehameha’s Court
Credit Lyonnais - In 1996, Credit Lyonnais was the world’s largest non-Japanese bank, ultimately owned by the French Government.
From the 10/01/96 net article, Credit Lyonnais & L.F. Rothchild Ready to Topple by J. Orlin Grabbe:
What will happen when the world’s largest non-Japanese bank topples? The repercussions will ripple throughout the world banking system. Get ready to see Citibank, Chase and the Chicago Mercantile hammered....
Credit Lyonnais has long relied on two simple mechanisms to ensure its bloated growth; a ready supply of money-laundering deposits from the Cali cartel and similar sources, and financial infusions from the French government (which owns most of the bank) when all else fails....
Meanwhile, the bank has frittered away its assets in an endless array of non-performing loans. Representative of this is Credit Lyonnais’ financing of Giancarlo Parretti’s purchase of Metro-Goldwyn-Mayer from Kirk Kerkorian in 1990 for $1.3 billion.
Later, in 1992, Credit Lyonnais acquired the assets of MGM, which it then sold to a Kirk Kerkorian-backed group for $1.3 billion earlier this year . . . after having pouring millions of dollars into the company.
The big private loser so far is L.F. Rothschild, much of whose fortune is tied up in Credit Lyonnais. . . . Meanwhile, the European Commission has launched a series of investigations into a number of suspicious transactions associated with Credit Lyonnaise....
Finally, there is the usual assortment of dead bodies that often appear in the banking world when millions of dollars are at stake.
One of these is Armschel Rothchild, who until his demise was the chairman of British mutual fund group, Rothschild Asset Management.
Amschel committed suicide by a very innovative method back in July. He took the belt from a hotel robe, tied one end to a towel rack, and the other end to his neck. He then hanged himself by, well, let’s see, “jerking back suddenly.” ... Hmmmmm.
* * *
From The Financial Express, 10/28/98: Credit Lyonnais sale put back to 1999 - French finance minister Dominique Strauss-Kahn will unveil the terms of sale for French bank Credit Lyonnais on Thursday but the float will now be pushed back to 1999... Several groups, including Europe’s largest two insurance companies — France’s AXA and Germany’s Allianz — have expressed interest in strategic stakes in the bank.
* * *
December 13, 1999
The Dirtiest Bank in the World
By David McClintick, Forbes Magazine
THE FIRE BEGAN at 8:30 on a Sunday morning in 1996 ... in the main trading room of Credit Lyonnais, one of France’s biggest banks. . . . Dozens of offices and thousands of documents, as well as the trading room, the largest in Continental Europe, built by Gustave Eiffel, were reduced to ashes and rubble. French police suspect the fire was the work of arsonists.
It’s a striking and fitting image of what Credit Lyonnais has become. Once a force in global finance, the bank is little more than half its former size, having been looted by criminals, racked by scandal and decimated by the loss of at least $20 billion...in reckless and corrupt investments.
It is by far the biggest banking debacle in history. This institution, nationalized by the French government in 1945, is an object lesson in what can go wrong in a government-owned commercial enterprise without accountability....
A criminal inquiry, which began quietly five years ago as a narrow probe of an eccentric Italian tycoon, has grown dramatically into more than 100 separate cases of suspected fraud, embezzlement, bribery, perjury, forgery, money-laundering, and even blackmail and arson in France and several other nations, including the U.S....
The Department of Justice, the FBI, the IRS and the Federal Reserve ... are examining Credit Lyonnais’ far-flung activities. Rarely have U.S. authorities so deeply probed the operations of a foreign bank. It is now clear that Credit Lyonnais was an octopus of fraud. By comparison, the infamous BCCI, which collapsed with a $7 billion loss, was small change....
Unlike BCCI, Credit Lyonnais is still with us. Reorganized in a French taxpayer-funded bailout that segregated most of the bad loans into a separate entity, the bank was privatized earlier this year, with the government retaining 10% of the common shares. Credit Lyonnais is now a profitable business, with assets of $214 billion, new management and a market value of $9.6 billion. But the sordid past is not behind it. It will be years before the lawsuits and criminal investigations are resolved and the bad assets liquidated....
Among possible crimes in the U.S. under investigation are securities fraud, mail fraud and lying to the Federal Reserve in connection with the purchase of the controversial California insurance company, Executive Life, and its junk bond portfolio....
If the Federal Reserve finds Credit Lyonnais culpable for serious misconduct, as it did Japan’s Daiwa Bank, it could fine it tens — even hundreds — of millions of dollars and even expel it from the country, where it is believed to earn more profit than in any nation outside France....
In France it is nothing less than a phenomenon of historic import, a jolting demonstration of the arrogance, insularity and lack of accountability of the state-dominated elite that has governed the country’s financial sector since World War II. The criminal investigation is the country’s largest ever. In a move virtually unprecedented in history, offices of the French Treasury, the core of the Ministry of Finance, have been searched for evidence of crime....
Investigators are probing a wide array of Credit Lyonnais’ clients and subsidiaries, some of which have bred sizable scandals of their own. These include the doings of such former clients as Robert Maxwell, the late British publisher who died under mysterious circumstances in 1991, and Bernard Tapie, who owned Adidas for a time with Credit Lyonnais’ help and later went to prison for bribery in a separate case....
Even a former governor of France’s central bank has been questioned. Investigators had discussed with other top officials whether their actions or inactions might have fostered Credit Lyonnais’ frauds and losses.
Prominent financiers, well-known in global banking circles, face possible imprisonment, financial calamity and public disgrace....
Crossroads Group - In 1996, Hawaii’s Bishop Estate loaned approximately $1 million of the trust’s funds to Charles Harmon, Jr., an investment banker and former general partner of Goldman Sachs.
From: Pacific Business News, 8/12/96: . . . Bishop Estate has quietly purchased the majority interest of a Connecticut specialized advisory business that manages almost $1 billion in assets.
Royal Hawaiian Shopping Center, Inc., a for-profit subsidiary of Bishop Estate, is a co-investor in the purchase of Bigler Investment Management, a Farmington, Conn., firm that manages fund-of-fund accounts....
The purchasing entity, called The Crossroads Group, is expected to take on a much more aggressive money-management outlook. ... other investors in The Crossroads Group are parties that have had ‘long relationships’ with Royal Hawaiian....
Massachusetts equity analyst Steven P. Galante said his own research found Bishop Estate purchased about a 60% stake in The Crossroads Group. The management team and others own the remaining interest....
According to Galante ... principals of The Crossroads Group are: Charles M. Harmon, Jr., an investment banker and former general partner at Goldman, Sachs & Co. in New York; Larry I. Landry, chief investment officer of John D. & Catherine T. MacArthur Foundation in Chicago; and Brad Heppner, a consultant at Bain & Co. in Dallas and former director of private investments at the MacArthur Foundation....
All have prior experience with Bishop Estate. In 1993, the MacArthur Foundation, along with Duke University’s endowment fund, backed the formation of a Boston merchant bank called Orion Capital Partners LP.....
Harmon is familiar with Bishop Estate because the Hawaii trust owns 10 percent of Goldman Sachs....
Bigler Investment Management’s fund-of-fund clients include Connecticut State Treasury, Massachusetts’ Pension Reserves Investment Management Board, Rhode Island Employees’ Retirement System, City & County of San Francisco Retirement System and the pension funds of E.I. duPont de Nemours & Co ....
For more, GO TO > > > A Connecticut Yankee in King Kamehameha’s Court
Delphi Corp. - An automotive parts company with a very well-connected history with General Motors.
April 8, 2005
Class Action Suit Against Delphi Corp.
A class action commenced against Delphi Corp. for violations of the Employee Retirement Income Security Act of 1974 (“ERISA”)....
The class action focuses on investments in DPH stock by the Delphi Savings-Stock Purchase Program for Salaried Employees from May 28, 1999, through March 11, 2005...
Specifically, the Plaintiffs allege in the Complaint:
(1) the Defendants who administered the Plan had a duty to disclose to and inform the other fiduciaries of the Plan of information, which the other fiduciaries of the Plan reasonably needed to know to fulfill their fiduciary duties to the Plan participants and beneficiaries;
(2) that Defendants who communicated with participants regarding the Plan’s assets, or had a duty to do so, failed to provide participants with complete and accurate information regarding DPH stock sufficient to advise participants of the true risks of investing their retirement savings in DPH stock;
(3) that Defendants made affirmative, material misrepresentations to the participants and beneficiaries of the Plan about the appropriateness of investing in Company stock and about Delphi’s financial condition through incorporation of the material, untruthful information contained in the company’s SEC filings into the Plan’s summary plan description; and
(4) that Defendants breached their fiduciary duties to Plaintiffs in violation of ERISA by failing to prudently and loyally manage the Plan’s investment in DPH stock when the stock was no longer a prudent investment for participants’ retirement savings...
For more, GO TO > > > Marsh & McLennan: The Marsh Birds
Enron Corporation - An object lesson in 401K plans.
December 14, 2001
Enron makes Whitewater smell like roses
By Bill Press
WASHINGTON (Tribune Media Services) -- Something smells rotten in Houston. Energy giant Enron, which used to brag about becoming the world's biggest company, now holds the record for the country's biggest ever bankruptcy filing.
The human impact is staggering.
Some 4500 employees are out of work. Tens of thousands of investors watched their Enron stock sink suddenly from $83 per share to 26 cents, wiping out $60 billion of stockholder value.
And those 11,000 employees whose 401K funds were invested exclusively in Enron – and who were forbidden by Enron's own rules from diversifying -- today have no retirement plan at all.
But Enron may be more than the world's biggest corporate disaster. It could also be the world's biggest case of corporate criminality.
Enron's demise wasn't due to business factors like strong competition, a shrinking market or a lagging economy. It was due to deceitful, and perhaps illegal, games played by corporate executives: diverting funds into secret partnerships, cooking the books to keep those deals secret, lying to investors and employees about the financial health of the company, while selling their own stock to make sure they wouldn't be hurt when the whole house of cards collapsed.
Unlike thousands of employees, for example, Enron Chairman Kenneth Lay isn't crying the blues.
He cashed out on $123 million worth of stock options in 2000 alone, and this year pocketed another $25 million.
Even as the company started falling apart, other executives were rewarded. Just days before filing for bankruptcy, Enron handed $55 million out to some 500 senior officials: an average $110,000 bonus for screwing up.
Yes, something smells rotten in Houston. But something smells rotten in Washington, too -- because both the rise and fall of Enron are closely linked to the political fortunes of George W. Bush....
* * *
January 14, 2002
Ex-Enron workers left with little but anger
By Mark Babineck, Associated Press
HOUSTON – Losing his retirement investment in Enron Corp. was one thing. What really hurt, says Charles Prestwood, was realizing that his unwavering corporate loyalty ran only one direction.
“We had great trust, great loyalty,” said Prestwood, 63, who retired as a plant operator in 2000. “We were trained loyalty above everything.”
More than a month after Enron shed more than 5,000 jobs worldwide and its stock bottomed out, retirees and laid-off workers are facing up to the ways the debacle has stung them.
Enron employees whose 401(k) accounts were filled with company stock watched helplessly as ceaseless bad news obliterated its value last fall, while a bookkeeping mechanism barred them from cashing out.
“I’ll never trust my employer quite the same again,” said “Tim Dalton, a corporate security specialist who was among the 4,500 Houston workers laid off in December.
Enron chairman Kenneth Lay “was like the Pied Piper. We followed him like lemmings into the sea,” said Deborah DeFforge, who might have to leave Houston for the West Coast to find work.
Congressional committees as well as the Justice and labor departments want to know why many senior Enron executives and board members sold their stock when it was still valuable, while workers were barred from selling stock in their 401(k) transactions was implemented because the plan changed administration. By the time transactions could resume, the price was $9.98. It now sells for about 68 cents.
The peak value of Prestwood’s retirement account, about $1.3 million, might sound lavish. But he had intended to live off the dividends, plus Social Security and a small pension....
“What so hurts about the whole deal is that something you devote your whole life to, you see it destroyed right in front of your eyes,” he said.
Prestwood is one of a number of former Enron workers who have filed lawsuits over their 401(k)s....
“We had no idea the books were messed up,” Prestwood said.
“When you’re locked in and sit there crying and watching it melt down, something you’ve devoted your whole life to building, it’s sad.”
* * *
STATES THAT LOST ON ENRON STOCK
Alabama Retirement System
$47 million
Alaska State Pension Fund
$26 million
~ ~ ~
CALIFORNIA
California Public Employees Retirement Plan
$40 million
California Teachers Retirement Plan
$49 million
Los Angeles Pension Fund
$11 million
San Francisco Pension Fund
$2 million
University of California Regents
$144 million
~ ~ ~
Connecticut State Pension Fund
$15 million
Florida State Board of Administration
$335 million
Georgia State Pension Fund
$127 million
Idaho State Employee Retirement Fund
$2 million
Idaho State Endowment Fund
$4 million
Illinois State Employees Retirement System
$11-12 million
Illinois Teachers Retirement Fund
$14 million
Illinois Universities Retirement Fund
$8 million
Minnesota State Pension Fund
$20 million
Missouri Public School Retirement System
$23 million
Missouri State Pension Fund
$9 million
Nevada State Pension Fund
$22 million
New Jersey State Pension Fund
$61 million
New York City Pension Fund
$109 million
New York State Pension Fund
$58 million
North Carolina Pension Fund for State and Local Employees
$15 million
Ohio State Pension Fund
$114 million
Oregon State Pension Fund
$77 million
Rhode Island State Pension Fund
$5 million
South Carolina State Pension Fund
$15 million
Texas State Employee Retirement System
$24 million
Texas Teacher Retirement System
$36 million
Washington State Employees Retirement System
$103 million
~ ~ ~
Lost money?
THE FEELING IS MUTUAL
Enron Exposed! published a list of almost 500 mutual funds that owned Enron stock as of September 30 when it was worth $27 a share. Enron recently traded at $0.21 a share. Call your fund manager to see when he or she got out!
The following are just a few of the well-known Fund Managers that went down for the count:
AAL; AAM; ABM; ADVANCE CAPITAL; AETNA; AIM; ALLIANCE; AMANA; AMERICAN AADVANTAGE; AMERICAN CENTURY; AMERICAN GAS; AMERICAN PERFORMANCE EQUITY; AMSOUTH; ARMADA; ASAF; ATLAS; AXP; BADGLEY; BAILARD, BIEHL & KAISER; BANKNORTH; BARCLAYS GLOBAL; BB&T; BISHOP STREET; BLACKROCK; BNY; BREMER; BRIDGES INVESTMENT; BRINSON; BRUNDAGE, STORY & ROSE; BUFFALO; CALIFORNIA INVESTMENT; CANANDAIGUA EQUITY; CAPSTONE; CATHOLIC; CDC; CENTURA; COMMERCE VALUE; CONSULTING GROUP; CREDIT SUISSE; CRM; DELAWARE; DESSAUER GLOBAL; DEUTSCHE; DEVCAP; DFA; DIVERSIFIED INVESTORS; DLB; DOMINI SOCIAL EQUITY; DOW JONES ISLAMIC INDEX K; DREYFUS; DUNCAN-HURST; EATON VANCE; ECLIPSE; ENTERPRISE EQUITY; EUREKA EQUITY; EVERGREEN; EXCELSIOR; EXETER PUREMARK; FEDERATED; FIDELITY ADVISOR; FIDELITY; FIFTH THIRD; FIRST AMERICAN; FIRST INVESTORS; FIRSTMERIT; FLEX-FUNDS; FMI; FORUM EQUITY; FRANK RUSSELL; FRANKLIN; FRIENDS IVORY SOCIAL AWARENESS; FTI; GALAXY; GARTMORE, GATEWAY, GE, GLOBALT; GMO; GOLDMAN SACHS; GOVERNMENT STREET EQUITY; GUARDIAN; GW & K; HANCOCK; HARBOR; HARRIS; HARTFORD; HIBERNIA; HIGHMARK; HSBC; HUNTINGTON; IDEX; INDEPENDENCE ONE EQUITY TRUST; INVESCO; INVESTEC; IPS; ISI; JANUS; JOHN HANCOCK; JP MORGAN; JUNDT; LIBERTY; LIGHT REVOLUTION; LORD ABBETT; LUTHERAN BROTHERHOOD; M.S.D.&T.; MAINSTAY; MARTIN CAPITAL; MASON STREET; MASSMUTUAL; MATTERHORN; MAXIM VALUE; MEEDER; MERCURY; MERRILL LYNCH; MFS; MONTEREY MURPHY; MONTGOMERY; MORGAN STANLEY; MUNDER; MUTUAL OF AMERICA; NATIONS; NATIONWIDE; NOAH; NORTH TRACK; NORTHERN; NUBEEN RITTENHOUSE; OAKRIDGE; OLD DOMINION INVESTORS; ONE GROUP; OPPENHEIMER; ORCHARD; PACIFIC ADVISORS; PACIFIC CAPITAL; PARNASSUS; PAX; PAYDEN; PBHG; PHOENIX-ENGEMANN; PHOENIX-OAKHURST; PILGRIM; PIMCO; PIONEER; PREFERRED ASSET ALLOCATION; PRINCIPAL; PROFUNDS; PROVIDENT; PRUDENTIAL; PUTNAM; QUAKER; REGIONS MORGAN KEEGAN; RESERVE LARGE-CAP GROWTH; RIGGS; RIVERFRONT; ROCHDALE; RYDEX; SAND HILL; SCHWAB; SCUDDER S&P; SECURITY; SEI; SENTINEL; SIT; SM&R; SMITH BARNEY; SSgA; STANDISH; STATE FARM; STEIN ROE; STERLING; STI; STRATEGIC PARTNERS; STRONG; SUMMIT APEX; SUNAMERICA; T.ROWE PRICE; TARGET; TCW GALILEO; TD WATERHOUSE; THE WATER FUND; TIAA-CREF; TOUCHSTONE; TRANSAMERICA PREMIER; U.S. GLOBAL INVESTORS; UAM; UNITED ASSOCIATION; USAA; VALUE LINE; VANGUARD; VANTAGEPOINT; VICTORY; W&R; WACHOVIA; WADDELL & REED; WALDEN/BBT; WAYNE HUMMER; WELLS FARGO; WESTCORE; WILSHIRE; WM; WRIGHT; WST.
The Enron Exposed magazine printed the ticker code, number of Enron shares held, market value as of September 30th, and percentage of assets for each of the funds named. The magazine credited Morningstar, Inc. as the source of the information.
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For a closer look at HOW Enron pulled one of the greatest nest egg robberies in history, GO TO > > > The Story of Enron
Executive Life Insurance Company - from a California Department of Insurance Press Release, Feb 18, 1999:
COMMISSIONER QUACKENBUSH SEEKS RECOVERY OF
BILLIONS OF DOLLARS FOR FRAUD IN THE REHABILITATION
OF EXECUTIVE LIFE INSURANCE COMPANY
LOS ANGELES -- California Insurance Commissioner Chuck Quackenbush announced today that he has filed a lawsuit in Los Angeles County Superior Court seeking disgorgement of (return of) profits and other relief against six corporate and three individual defendants that were involved in the 1991 rehabilitation of Executive Life Insurance Company.
Commissioner Quackenbush's lawsuit alleges that in an effort to obtain Executive Life's multi-billion dollar portfolio of "junk bonds," the defendants fraudulently concealed the involvement of a French Government-owned bank and its subsidiary in the ownership and management of a new insurance company. The concealment is believed to have been designed to skirt California insurance laws and regulations, and possibly federal law prohibiting bank ownership of insurance companies.
"These rogue individuals and their corporate partners came to California with a scheme shrouded in lawless deceit, so they could evade regulations intended to protect innocent policyholders and consumers," said Commissioner Quackenbush. "Although the deeds were done on another Commissioner's watch, I am going to ensure that the foreign financiers who perpetrated this scheme are made to pay, and that fast operators never again think they can manipulate and evade state authority."
Specifically alleging fraud, deceit, misrepresentation and unfair competition (Section 17200 of the California Business and Professions Code), the Commissioner has sued Altus Finance S.A., CDR Enterprises, Credit Lyonnais, S.A., Mutuelle Assurance Artisanale de France, Mutuelle Assurance Artisanale de France Vie S.A., Omnium Geneve S.A., Jean-Claude Seys, Jean-Francois Henin and Jean Irigoin. The lawsuit seeks compensatory damages according to proof, punitive damages, and disgorgement of profits.
In 1991, Insurance Commissioner John Garamendi was appointed as conservator of the insolvent Executive Life Insurance Company. Thereafter, Commissioner Garamendi solicited bids for the rehabilitation of the company's business, including the assumption of its life insurance policies and annuities. Among competing bids was a proposal by Altus Finance S.A. and a number of French investors which provided that Altus would purchase Executive Life's "junk bonds" and the investors would set up an insurance company that would take over Executive Life's policies.
Altus was owned by Credit Lyonnais, a French bank that is, in turn, owned by the French Government.
Unknown to the Commissioner, Altus secretly entered into agreements with some of the French investors which provided that Altus, not the investors, would own the new company. Further, Altus and some of the French investors secretly agreed that management of the new insurance company would be controlled by Altus. Altus and the French investors then filed false and misleading documents with Commissioner Garamendi, which purported that the new company was owned by the French investors.
Commissioner Quackenbush believes that California law would have barred Altus from being approved as the owner of the new insurance company, and further, ownership of an insurance company by Altus might have violated the federal Glass-Steagal Act.
The Glass-Steagal Act generally prohibited banks from owning insurance companies.
Through its deception, Altus acquired the junk bonds, which are believed to have generated billions in profits.
Last Revised - February 18, 1999
Copyright © California Department of Insurance
Catbird Note: It was the Glass-Steagal Act that was later repealed by the Clinton administration – with Treasury Secretary Robert Rubin leading the charge for change.
For more, GO TO > > > Apollo
Florida - From “Enron Exposed!”, by American Media Specials, Inc.: . . .
LIFE SAVINGS LOST
Donald Nast, chairman of the finance department at Florida State University told AMI: “The Enron disaster has brought to light a number of problems, not the least of which is diversification of investments. If you don’t, you’re setting yourself up for a real disaster.”
Nast also is chairman of Florida pension fund, which lost a whopping $335 million on Enron. That gives Florida the dubious distinction of suffering the biggest loss of any government fund in the country.
Nast pointed out that although the multibillion dollar fund will easily survive the gigantic financial hit, “The loss was a lot of money.”
He also noted that “it’s been a terrible loss for investors all over the country. This is money that people will never get back.”
The Florida pension money was being managed by Al Harrison of Alliance Capital.
Harrison, who prior to the Enron debacle had a stellar record of success, continued to purchase Enron stock as it was plummeting last October and November.
One question being asked is whether Frank Savage, who is on the board of directors of both Enron and Alliance Capital, influenced Harrison’s decisions. The situation is under investigation by Florida’s attorney general.
Florida state Rep. Mark Flanagan, who chairs a committee investigating the losses, told The New York Times: “Even the little old lady in Pasadena knew Enron was in trouble. Every other investment manager was bailing out. He heard the same bad news. Yet he continued to buy. We don’t have a good explanation why.” . . .
See also, Alliance Capital
Georgia - From “Enron Exposed” by American Media Specials:
LIFE SAVINGS LOST
In August 2000, Enron stock sold for more than $90 a share, but by March of this year it had plunged to 25 cents. In essence, a company that last year was ranked seventh largest in the country is now worthless....
Unbeknownst to hundreds of thousands, if not millions of Americans, they owned Enron shares in employee retirement accounts or in mutual funds. . . .
“We probably got taken,” Frank Perriello, the public information officer for the Employee Retirement System of Georgia told AMI, explaining why his organization lost $127 million in the Enron debacle.
Perriello said that the fund will probably sue Enron.
Hawaii Employees’ Retirement System -
August 13, 2008
Retiree fund
down $150.2M
Honolulu Advertiser Staff
The market value of assets in the Hawai'i Employees' Retirement System slid by $150.2 million during the latest quarter as the pension fund had a negative return on investments because of turbulent financial markets.
The pension plan had a negative 1 percent return during the April-June period, a better performance than expected — and better, too, than the negative 1.4 percent median returns of similar plans.
The pension plan ended the quarter with $10.8 billion in assets.
The end of the quarter also marked the end of the fiscal year for the ERS. During the second half of the 12-month period the ERS had negative returns; it ended its fiscal year with assets lower by $730.1 million.
The pension plan provides retirement benefits for state and county workers and employs investment advisers to manage its portfolio of stocks, bonds, real estate and other investments as it tries to achieve an annual return of 8 percent.
For the fiscal year, the ERS had a return of negative 3.4 percent. Its peer plans had a median return of negative 4.4 percent during the period.
Even with the decline in assets the ERS has enough money for now to provide retirement benefits for its more than 100,000 members.
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State finds new pension savings administrator
By Johnny Brannon, Honolulu Advertiser
The state has quietly dumped the longtime administrator of its Deferred Compensation Plan for public employees and selected another firm owned in part by a parent company targeted in a major fraud investigation.
The state has put its new contract with CitiStreet LLC on hold, however, because of unrelated protests filed by other bidders, including Hawaii Benefits Inc., which has managed the plan for more than 20 years.
CitiStreet is a joint venture half-owned by Citigroup, one of the top lenders to collapsed energy giant Enron. Members of the U.S. Senate Governmental Affairs Committee have alleged that Citigroup helped Enron hide its massive debt problems from investors, and an investigation is ongoing.
The deferred compensation plan administrator manages the enrollment and record keeping for money that public employees elect to have deducted from their paychecks and invested for future needs such as retirement. There are more than 43,000 participants employed by the state and the counties of Hawai'i, Kaua'i and Maui.
The administrator proposes investments, but a state board of trustees makes the final selections of investment options and monitors their performance.
A petition that sharply criticizes Citistreet has begun circulating among some state employees, which asks the trustees to reconsider its award because of the fraud probe and other matters.
Acting board president Diana Kaapu did not return repeated calls. She recently issued a notice to clarify key issues related to the choice "because inaccurate and misleading information concerning actions" by the board had "been disseminated recently."
The selection was made in October under the tenure of former board president Davis Yogi, who now serves as state airports director. He said the seven trustees considered a range of factors in making their selection, such as the variety of services offered and how the firm would educate participants about their investment options.
Yogi said the trustees voted anonymously, and declined to say whether he was satisfied with the selection that was made. He said the trustees were aware of the fraud allegations involving Citigroup and made numerous inquiries about its potential impact on CitiStreet.
The current five-year contract with Hawaii Benefits was worth about $16 million, and had been extended for one year at about $3.3 million, he said.
The administrator contract was put out to bid because Hawaii Benefits' contract expires on June 30. The contract is paid for by plan participants through administrative fees, rather than by the state.
In a letter to the board, Hawaii Benefits president Mike Moss said he was "disappointed and perplexed" that his firm was not chosen to continue as plan administrator. He said the company enjoyed "the highest level of participant satisfaction."
He said the company had been given no indication that the board was dissatisfied with Hawaii Benefits and requested an opportunity to satisfy any changed expectations of board members.
The other company challenging the award is Great-West Life and Annuity Insurance Company/Benefits Corp.
The firm believes CitiStreet will unfairly be able to use a subsidiary to handle its marketing, Great-West senior vice-president of government marketing Gregg Seller said.
That would give the subsidiary access to plan participants' addresses and phone numbers to market other products that had not been approved by the trustees, he said.
He said the board had also refused to accept a written response to a clarification to the bid Great-West submitted.
"We weren't modifying the proposal, just explaining how it would work," he said.
Representatives from CitiStreet did not immediately return calls.
Many members of the Hawai'i Government Employees Association have called the union's headquarters to inquire about the new plan administrator and ask a wide variety of questions, HGEA deputy executive director Randy Perreira said.
"This is retirement money for these people, so certainly we would hope their money is safe," he said.
The union was apprised of the new contract but was not involved in the selection process and has little information about the challenges that have been lodged, he added.
Citigroup's links with Enron are being probed by the Senate panel's Permanent Subcommittee on Investigations.
"Enron's deceptions were shocking, and equally shocking was the extent to which respected U.S. financial institutions like Chase, Citigroup and Merrill Lynch helped Enron carry out its deceptions," the subcommittee's head, Sen. Carl Levin, D-Mich., said in a written statement.
Citigroup announced earlier this month that it would establish a $1.5 billion reserve to pay for litigation and settlements.
For more on Citigroup, GO TO > > > Vampires in the City
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From Honolulu Star-Bulletin, 9/12/97: Ex-Justice Nakamura dies: . . . Former labor attorney and state Supreme Court Justice Edward Nakamura, widely regarded as a man of integrity unafraid to criticize abuses of power, died early yesterday at Queen’s Hospital after undergoing open heart surgery. . . .
Even after retirement in 1989 ... Nakamura remained an influential figure. He played a key behind-the-scenes role in the crafting of the Aug 9 “Broken Trust” opinion piece in the Star-Bulletin that spurred Gov Ben Cayetano to order an investigation of the $10 billion Bishop Estate . . .
“It was only after three meetings with Ed over pancakes at the Like Like Drive Inn that I started to see ‘the whole picture,’” said University of Hawaii law Professor Randall Roth, one of the five authors of the essay. “Without his guidance, the project might never have gotten off the ground.”
Nakamura provided insight into how things worked. “It was an insider’s look at the Democratic power structure,” Roth said. “He was fed up with the way things have evolved. He felt some people in recent years betrayed what the ideals of the Democratic revolution (of the 1950s) were all about. They were watching out for themselves rather than the ideals of their predecessors.”
Roth added: “In his quiet but firm way, Ed always followed his conscience, even when that was certain to displease powerful people.”
In 1993, Nakamura opposed then-Gov. John Waihee’s nomination of attorney Sharon Himeno to the state Supreme Court, which drew fire because of her political connections and because her law firm represented her father, developer Stanley Himeno, in a questionable business deal involving the state pension fund.
Nakamura advised attorney who publicly opposed Himeno’s nomination, which was rejected by the Senate.
Resigned from Board. That same year, Nakamura testified in the Senate’s special investigation into the management of the state pension fund. He said that during his tenure as a fund trustee, a golf course deal was pushed by the then-chairman of the Employees’ Retirement System, Gordon Uyeda, that would have provided a financial windfall for Uyeda’s friend, developer Rodney Inaba.
When the pension board voted to purchase the Wood Ranch Golf Club in Simi Valley, Calif., Nakamura resigned in protest.
But the $31 million deal quickly unraveled with Waihee apparently playing a role in getting trustees to abandon the project. . . .
Retired state appellate Judge Walter Heen, another co-author of the “Broken Trust” opinion piece, said: “Justice Nakamura will stand out in the history of Hawaii as one of its finest legal minds and one who possessed the highest concern for principle. His opinions reflect both those characteristics.” . . .
Nakamura’s nephew, attorney James Kawashima ... added: “He was very principled and always ethical. Sometimes that’s rare in people and lawyers both.”
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From Honolulu Star-Bulletin, 3/11/97: Nomura scandal spurs isle concern. . . . Trustees of the $7 billion state Employees’ Retirement System plan to discuss their dealings next month with Nomura Capital Management Inc. whose Japanese parent company, Nomura Securities Inc., is embroiled in a major scandal over unauthorized trading.
Stanley Siu, the ERS’s administrator, said that Nomura Capital executives in New York called him yesterday to assure him that questionable trades do not involve the retirement system’s investments. ... Nomura Capital manages about $185 million of ERS’s investments in Asia ...
Siu noted that Nomura Capital’s investments for the ERS in Asia declined 3.8% in 1996 due largely to Japan’s sagging stock market....
For more, GO TO > > > Predators in Paradise; Citigroup: Vampires in the City; Marsh & McLennan’s Mercer Consulting; CV05-00030-Farmer vs. Harmon - Witnesses: Yukio Takemoto; Linda Lingle; Ben Cayetano; David Farmer
HCA - The nation’s largest for-profit hospital chain.
December 18, 2002
HCA cuts deal to end fraud probe
Hospital company to pay $631 million
Copyright 2002 Houston Chronicle News Services
NASHVILLE, Tenn. -- HCA, the nation's largest for-profit hospital chain, announced a $631 million settlement Wednesday with Justice Department attorneys that would end the government's nine-year investigation of health care fraud allegations against the company.
The settlement, which requires formal approval by the Justice Department and the courts, would raise the amount of civil fines and criminal penalties the Nashville-based company has paid the government to $1.7 billion over the past few years.
HCA had pleaded guilty previously to defrauding government health care programs.
In the cases included in the settlement agreement, whistle-blowers alleged the company filed false claims and paid kickbacks to doctors so they would refer Medicare and Medicaid patients to its facilities.
James Thompson, a Texas doctor who filed a whistle-blower suit in 1995 alleging kickbacks and Medicare fraud, said the case cost him his health and his practice. He said other doctors ostracized him, so he practiced alone without a day off for three years, suffering a stroke in 1998.
"I said it then, and I'll say it again: Doctors have a duty to protect the health of the community. They protect their patients first, and profits last," said Thompson, who filed the suit in Corpus Christi and lives in Rockport.
"I am proud of what I did, and I'd do it again. But I'm sure glad it's over."
However, attorneys representing other whistle-blowers were not ready to sign off on the settlement. The government has not detailed how the money will be split up or how much will go to the whistle-blowers.
"We have a statutory right and obligation to ensure the settlement is fair, adequate and reasonable," said John R. Phillips of Phillips & Cohen, which represented the whistle-blowers in the cost-report case. "Once we have more information, we intend to fully analyze the settlement."
The firm represents James Alderson, former chief financial officer of a Montana hospital run by a company once owned by HCA. He says he was fired for failing to include aggressive claims on a cost report and filed suit in 1993 charging fraud. That is when the Justice Department began examining the allegations.
Stephen Meagher, another attorney for the whistle-blowers, said attorneys were about to take depositions from HCA Chief Executive Officer Jack Bovender and co-founder Thomas Frist Jr.
Bovender was scheduled to testify next month and Frist in February, he said.
The settlement also comes with Sen. Bill Frist, a Tennessee Republican and Thomas Frist's brother, emerging as a candidate to replace Trent Lott as Senate majority leader.
Under the settlement agreement, HCA would pay the Justice Department $631 million beginning Feb. 3 and the government would end its investigation.
Whistle-blowers like Thompson and Alderson may be entitled to a share of that money.
Previously, HCA agreed to pay $250 million to resolve non-related outstanding Medicare cost report issues with the Centers for Medicare and Medicaid Services. The company, formerly known as Columbia/HCA, paid $840 million in 2001 to settle other whistle-blower cases and pay criminal fines.
In 1999, two former HCA executives -- Jay Jarrell and Robert Whiteside -- were convicted of conspiring to defraud the government and making false statements in Medicare reimbursement cost reports for a hospital in Port Charlotte, Fla.
The convictions were overturned this year on appeal. It was the only case that went to trial.
The Justice Department closed its criminal investigation of HCA executives in July, clearing them to testify in the civil Medicare and Medicaid fraud cases.
The company also said Wednesday it has reached an agreement with attorneys representing states with claims similar to the government's. Under this agreement, HCA will pay $17.5 million to state Medicaid agencies.
HCA expects to charge approximately $395 million against earnings after taxes in the fourth quarter of 2002 because of the settlements.
The company also will be obligated by law to pay legal fees of the whistle-blowers' attorneys. The company expects to record a charge for these fees in the fourth quarter of 2002.
"We are pleased to have successfully negotiated a settlement to the remaining two civil issues," said Jack O. Bovender Jr., HCA chairman and CEO.
Justice Department spokesman Charles Miller issued a statement saying, "We have had discussions with HCA about resolving this civil litigation. The staff assigned to this matter has now reached a tentative understanding with HCA for a settlement."
"Until I see the math, I'll remain skeptical," Sen. Charles Grassley, an Iowa Republican who helped rewrite the whistle-blower law, said in a written statement.
"This settlement can't be a Christmas gift to HCA and a lump of coal for the taxpayers."
Wall Street liked the news. HCA shares rose 3.4 percent, or $1.39 a share, to close Wednesday at $42.90 on the New York Stock Exchange.
- For much more on HCA and Treasury Secretary William Frist, GO TO >>> The Dissection of ‘Fristy’
Hotel Union & Hotel Industry of Hawaii Pension Plan - Uh, oh!
June 23, 1998
Isle hotel union funds
suing stock brokerage
By Russ Lynch, Star-Bulletin
Two trust funds for the hotel workers union in Hawaii are suing Smith Barney Inc., alleging that the brokerage ran up excessive commissions on trades made for fund investment advisers.
The action was filed in state Circuit Court by Tony Rutledge as a trustee of the $300 million-plus Hotel Union and Hotel Industry of Hawaii Pension Plan and the AFL Hotel & Restaurant Workers Health & Welfare Trust Fund.
It alleges that Smith Barney, hired by the funds as a consultant, helped the funds select financial advisers and then coerced those advisers to execute their trades through Smith Barney.
Other brokers were available who would have charged lower commissions, contends the lawsuit, which was filed last week.
Smith Barney executives in Honolulu and New York had no comment on the allegations.
Rutledge, financial secretary-treasurer of Hotel Employees and Restaurant Employees Local 5, charged that the investment advisers recommended by Smith Barney "placed nearly three-fourths of the listed trades through Smith Barney in order to retain their jobs and stay on good terms with Smith Barney."
The class-action lawsuit, which seeks unspecified damages, claims that in a sample year, 1996, Smith Barney got $300,000 in commissions out of the total $400,000.
* * *
February 10, 2000
Investment consultant faces
prison for fraud
By Debra Barayuga, Star-Bulletin
An investment consultant faces five years in federal prison on each of 11 counts of making false statements so he could become investment monitor for the Hotel Union and Hotel Industry of Hawaii Pension Plan.
A U.S. District Court jury on Tuesday found Anthony DiPace guilty of 11 counts of mail fraud.
He will be sentenced May 30 by U.S. District Judge Alan Ezra.
The mail fraud charges stemmed from mailings DiPace, of Albany, N.Y., sent in March 1996 to trustees of the pension fund that falsely represented his qualifications.
The investment monitor position would have paid more than $300,000 a year to oversee the investment managers who actually invest the fund's money. The pension fund has assets in excess of $200 million.
The six trustees, at the request of Anthony Rutledge, secretary-treasurer of Local 5 of the Hotel Employees and Restaurant Employees Union, agreed to remove Smith Barney as the fund's investment monitor and solicit proposals from brokerage houses, including DiPace's firm, said Assistant U.S. Attorney Marshall Silverberg.
According to court documents, DiPace claimed to have more Taft-Hartley Fund clients than he actually had and exaggerated their assets.
Rutledge said DiPace was hired as investment monitor for Unity House because of his experience. "We made substantial money for two years while he was our monitor and would have been exceptional for our pension fund."
He criticized the government's efforts to prosecute DiPace, saying "the guy didn't even get a job with the Trust Fund and he's got to go to jail."
Rutledge disagreed with testimony that came out saying he threatened to strike all Local 5 members if the trustees refused to hire DiPace as investment monitor. "Our members wouldn't strike whether we got this investment monitor or not."
The accusations were simply a smokescreen raised by the hotel trustees who were proposing to do away with the pension fund, Rutledge said.
* * *
October 31, 2002
Tony Rutledge’s son is indicted
by federal grand jury
Aaron Rutledge is accused of tampering
with a witness in 1997
By Debra Barayuga, Honolulu Star-Bulletin
An ongoing federal investigation into Unity House President Anthony "Tony" Rutledge apparently has netted the younger of his two sons.
A federal grand jury indicted Aaron Rutledge, 32, yesterday with one count of witness tampering.
The indictment charges that on Oct. 30, 1997, Aaron Rutledge persuaded another person to withhold, conceal or destroy evidence from a federal grand jury proceeding and a related criminal investigation.
Michael Green, attorney for Aaron Rutledge, could not be reached for comment.
Tony Rutledge, reached yesterday at Unity House offices, said he had no idea what the indictment is about but that federal authorities have been investigating him and anyone connected to him for the last five years, resulting in a few indictments.
The latest, however, has hit too close to home, he said.
"Whatever it is can't be anything serious," he said.
Aaron Rutledge has worked for Unity House for the past four years as special-events and sports coordinator....
"He's a good boy, never been in trouble," Tony Rutledge said.
Previously, Aaron Rutledge was secretary-treasurer of his family's Star Beachboys Inc., a concession at Kuhio Beach. He began running the business after his grandfather, Art Rutledge -- retired leader of Local 5 and the Hawaii Teamsters -- died in September 1997, but lost the contract four years ago.
Special Attorney Ted Groves, with the U.S. Department of Justice's Tax Division, one of two attorneys handling the case, said he could not comment on ongoing investigations.
The date of the alleged crime by Aaron Rutledge was the same day search warrants and subpoenas were served on Unity House, Local 5 of the Hotel Employees and Restaurant Employees Union, and his grandfather's Kahala home, exactly five years ago on Oct. 30, 1997. Federal agents had spent hours at the three locations seizing records and examining computer files.
Agents also seized receipts for the beach concession that his father had kept at home, as well as receipts deposited into a bank account, Tony Rutledge said.
He said no arrests or indictments came out of those searches. People associated with Rutledge, however, have since been indicted on other charges.
Former executive director of Unity House Roderick "Roddy" Rodriguez and former Unity House consultant Roberta Cabral were indicted in August 2000 on charges stemming from schemes to defraud the nonprofit labor organization.
Cabral is to be sentenced today in U.S. District Court after pleading guilty in June to failing to pay taxes and using offshore accounts to hide her income from the state and federal government.
Rodriguez died of an apparent suicide the day he was to be arraigned.
Aaron Rutledge is expected to be arraigned Nov. 18 in U.S. District Court. Witness tampering is punishable by a maximum 10 years' imprisonment and a $250,000 fine.
Integrated Resources - From Den of Thieves, by Pulitzer Prize winner, James B. Stewart: . . .
As Frederick H. Joseph wrestled with mounting administrative problems, more threatening trends appeared in Michael Milken’s vast junk-bond empire. . . . Any crack in the junk-bond facade had dire potential, because Milken’s big clients – from savings and loans like Columbia to insurance companies like Executive Life – were already so loaded with junk paper that any decline in the value of their junk portfolios would curb their ability to absorb more.
The crack, when it came, was an earthquake.
Just days after Milken’s formal resignation in June, Integrated Resources, a seller of tax-shelter partnerships that had diversified with $2 billion in Milken-financed junk bonds into a $15 billion insurance and real estate empire, defaulted on its interest payments. The quintessential Milken success story, Integrated had loyally issued junk bonds, invested in them, and become one of Milken’s biggest captive clients.
Integrated had attracted millions of dollars, the savings of unwitting investors, in its financial products. Its stock price had soared from $7 in 1981 to $46 in 1983. Even though the tax reform act of 1986 had curbed its profits on sales of tax shelters, Milken debt had propelled it into new lines of business. Top executives and major owners – members of the Zises family – had paid themselves huge salaries.
But with its underlying business eroding, Integrated was a house of cards, a microcosm of the whole junk-bond empire. Infusions of new debt could mask its financial deterioration for only so long....
In February 1990, Integrated would file for bankruptcy, wiping out the value of all of its junk bonds, including a sizable position held in Drexel’s own inventory.
Among the victims were thousands of investors, policyholders, and employees – a broad cross section of Americans, most of whom never knew Integrated had any connections to Drexel....
Investors Equity Life Insurance Company - From the Honolulu Star-Bulletin, 10/14/96: . . . The State of Hawaii will become the owner of thousands of acres of Colorado real estate, in its ongoing effort to recover assets for the 13,000 policy-holders of failed Investors Equity Life Insurance Co....
Gary Vose, who was chairman of Investors Equity when the state took it over in June 1994, has agreed to hand over The Meadows, a 4,000-acre subdivison at Castle Rock, Colo, to Hawaii Insurance Commissioner Wayne Metcalf . . .
Metcalf and the previous insurance commissioner, Lawrence Reifurth, have been working to recover assets since the state seized the insurance company after its management had run up a $60 million deficit. . . . The deficit, which has since grown to more than $90 million, was incurred largely because Vose lost policy-holders’ money in highly speculative leveraged investments known as derivatives, the state charges. . . .
Vose’s agreement to transfer The Meadows and a smaller subdivision settles the state’s lawsuit against him, Eugene Sprague, an attorney in Denver representing the Hawaii Insurance Division, said today. . . . Neither Vose’s attorney nor Metcalf could be reached for comment, so it was not immediately clear what the value of the Colorado properties might be. Sprague said he could not go into details because of a confidentiality agreement....
The Meadows was the brainchild of former savings and loan executive Charles Keating and was put up for auction after Keating’s Lincoln Savings & Loan Association became insolvent....
The state alleged that Vose then used $23.3 million of Investors Equity’s money, through one of his affiliated companies, to acquire the property in 1992.
In a civil suit, the state accused Vose of racketeering, fraud and other misconduct in buying The Meadows. The suit alleges that the holding company that controlled Investors Equity conducted sham real estate deals and used the insurance firm’s assets to pay huge fees to Vose and companies connected with him.
ITT Hartford Life Insurance Co. early this year acquired the Investors Equity policies, keeping them alive. A state insurance fund [aka US taxpayers’ money] contributed $10 million to boost the value.
* * *
Honolulu Star-Bulletin, Jun 97, by Rick Daysog: . . . Investors Equity Clients Learn Settlement Details: . . .
Bank of America in March agreed to pay $39 million to about 5,500 annuity investors to settle a state suit against the bank. . . . In its 1995 suit against Bank of America, the state alleged that the bank’s predecessor, Honfed Bank, misled 4,000 bank customers in their sales of Investors Equity annuities at bank branches.
* * *
The Honolulu Advertiser, 08/08/97, by Jean Christensen: . . . Archer Daniels Midland Investor Services must pay policyholders $8.3 million for its handling of investments on behalf of the failed Investors Equity Life Insurance Co., an arbitration panel ruled ... yesterday.
ADM Investor Services is among several brokerages targeted by the state in an attempt to recover part of the $100 million in total losses caused by the collapse of Investors Equity.
The state contends the brokerages exposed Investors Equity investors to more risk than financial guidelines allow. Most of Investors Equity’s losses came from speculative investments known as derivatives....
State Insurance Commissioner Rey Graulty said $12 million had be recovered from other brokerages prior to the arbitration panel’s decision in the ADM Investor Services case. Graulty is also pursuing cases against Goldman Sachs & Co., Tradition (Government Securities) Inc. and Tradition (North America) Inc....
He called the award “a big shot in the arm” for the state as it moves against Goldman Sachs... The award ... includes $6.9 million for net trading losses incurred by Investors Equity and $1.4 million in interest.... The three-member panel ruled that an ADM Investor Services executive responsible for the Investors Equity account had knowingly ignored the risk of loss to policyholders and was motivated by a desire to generate above-market fees, Graulty said.
* * *
Honolulu Star-Bulletin, 11/06/98, by Russ Lynch: . . . The investment firm of Goldman Sachs & Co. will pay $15.9 million to settle claims brought by the state on behalf of policy holders in the defunct Investors Equity Life Insurance Co. . . . As liquidator, [State Insurance Commissioner Rey] Graulty has been working to recover money for holders of annuity policies. Major targets have been national brokerages that invested the policyholders’ funds in risky derivatives and futures. Graulty said yesterday that during the first five months of 1994 alone, Investors Equity assets were used to trade more than $86 BILLION worth of treasury bond futures, resulting in losses well above the company’s 1993 net worth of $16 million....
One case remains unresolved, the state’s action against Archer-Daniels-Midland Investors Services, Inc. which is in the hands of the 9th Circuit Court of Appeals. The Investors Equity claims against others — Merrill Lynch & Co., Dean Witter Reynolds, Nomura Securities International, and Tradition North America Inc. — have been settled....
* * *
From the website posting Derivatives Links Page: . . . Derivatives, in part, have created a new world order. Not only do regulators not have easy access to all the participants, but there are participants that clearly are outside of the regulator’s reach, either because they are in a different industry, or are in a different country....
Michael Metz, chief investment strategist of Oppenheimer and Co. ... in trying to explain the dramatic fall in Wall Street on 27 October 1989, Metz highlighted the role of speculation caused by funds dealing with derivatives:
“These derivatives have too much leverage,” he said. “They are uncontrolled. With $4,000 under them, they can control $80,000 worth of stocks. This is crazy. This causes enormous risks and it is highly speculative. This situation is due to deregulation.”...
“Total global derivative trading comes to $55 trillion, more than the GDP of the world. It’s absolutely terrifying because we just don’t know what’s out there. And yet, how often do you hear about that on the evening news?”...
Investors Equity Life Insurance Co., in Hawaii lost $80 million in 3 days....
Other banks such as Drexel-Burham and the Bank of England have also incurred losses....
By the end of 1994, derivatives losses were estimated to be more than $10 billion....
For more, GO TO > > > Vultures in the Meadows
John Snow - George W. Bush’s new U.S. Treasury Secretary.
January 31, 2003
CSX Chief Approved as
Treasury Secretary
By Martin Crutsinger, Associated Press
WASHINGTON - The Senate approved President Bush’s nomination of John Snow as Treasury secretary last night after the railroad executive gave assurances he would review a department rule on pensions that opponents contend discriminates against older workers.
The nomination was approved by voice vote after many senators had already left the Capitol for the weekend.
Snow, the head of CSX Corp., was picked by Bush last month after the ouster of Paul O’Neill in a shake-up of the administration’s economic team.
Snow’s nomination won approval after he held a 40-minute meeting with Sens. Tom Harkin, D-Iowa, and Dick Durbin, D-Ill, who had blocked the nomination from being taken up by the full Senate until they had a chance to air their grievances over the pension issue.
They want the government to implement a rule that would prohibit companies from forcing workers out of so-called defined benefit plans into “cash balance” plans. Many companies have been adopting the new type of pension to cut costs.
The two senators said Snow gave no assurances on what shape the final Treasury rule would take but did pledge to keep the current moratorium on forced conversions in place until a final rule is implemented.
Durbin said he was satisfied with Snow’s assurances, saying Snow had recounted in the meeting that CSX employees had been given the choice of sticking with their current plans or switching to the new cash-benefit programs and that the same options were offered at other companies where Snow served on the board of directors.
While cash-balance pension plans offer better benefits for younger and shorter-tenured workers, they can penalize older workers.
Opponents contend that forcing workers to convert to the new plans violates federal age discrimination laws. Late last year, however, the Treasury Department issued proposed regulations that would state that such conversions are not discriminatory. Adoption of the Treasury rule would end a moratorium that has been in effect for more than two years that prevents companies from forcing employees out of current pension plans into the cash-benefit programs.
Workers in a cash-balance plan traditionally get a percentage of their salary that can be paid out as a lump sum or as an annuity when the leave. Unlike a 401(k) plan, workers don’t own the accounts or make investment decisions. Unlike a traditional pension plan, the worker does not get annual benefits from the company after retiring.
Cash-balance plans are cheaper to administer and attract younger workers because of their portability, pension experts say.
For more, GO TO > > > The Snow Birds
Kamehameha Schools Retirement Plan - Holder of the nest eggs for employees of one of the richest charitable trusts in the U.S.A.
For more, GO TO > > > Kamehameha Schools Pension Plan
Kansas Public Employees’ Retirement System - From Honolulu Star-Bulletin, 3/11/97:
Nomura scandal . . . Meanwhile, executives from the Kansas Public Employees’ Retirement System said they also would discuss their dealings with Nomura Capital at board meetings later this month. Nomura Capital manages $135 million for the Kansas fund....
See also: Nomura Securities; Yakuza.
Lucent Technologies - The AT&T spinoff.
July 20, 2003
Companies Hurt Own Pension funds
Corporations seek government aid in wake of
moves that pumped up earnings, cut costs
by Ellen E. Schultz, The Wall Street Journal
A lot of big companies call it a looming crisis: They suddenly need to pour millions of dollars into their pension plans because the plans don’t have enough cash to meet legal requirements.
Congress is moving to offer relief, and the White House is planning a remedy of its own.
But what companies aren’t saying is that some of them contributed to the problem themselves. They did so through a variety of strategic moves to pump up earnings or cut costs, at the price of reduced funding for their pension plans.
During the past decade, U.S. companies have siphoned off billions of dollars from their pension plans. They’ve used the cash to pay for retirees’ health coverage, the costs of laying off workers and even fees to benefits consultants....
One way some companies eroded or reversed their onetime pension surpluses was by tapping the pension assets to pay for staff reductions.
Lucent Technologies Inc., the big maker of telecom gear, used about $800 million in surplus pension assets to pay termination benefits as it cut 54,000 employees from its payroll in 2001 and 2002.
In the space of a year, the Lucent pension plan went from having $5.5. billion more than was legally required (Sept. 30, 2001) to being $1.7 billion “underfunded” (Sept. 30, 2002).
Employers have also used pension assets to pay for retirees’ medical expenses. Lucent withdrew $1.2 billion from its pension plan for that purpose between 1999 and the end of 2002....
A spokeswoman for Lucent said its withdrawal of assets had less effect on pension funding than investment losses and the decline in interest rates. She said the pension plan remains healthy....
Marsh & McLennan - The world’s largest insurance broker.
$ $ $
What goes around comes around ...
October 20, 2004
Investors Are Losing Ground as
Insurance Inquires Expand
By Gretchen Morgenson, The New York Times
The disastrous decline in Marsh & McLennan’s stock that has followed Eliot Spitzer’s lawsuit of last week has injured a broad array of institutional and individual investors. But the pain of losing almost 50 percent in share value is perhaps most excruciating to the thousands of Marsh & McLennan employees who have bought Marsh stock in the company’s employee stock purchase plan or in their retirement plans.
In the months after the market crash of 2000, the lesson of diversifying beyond one company’s stock was hammered home. But as the market recovered, many workers seemed to forget that important lesson. Marsh employees were among them; at the end of last year, one employee-benefit plan had $1.3 billion invested in Marsh & McLennan stock.
Now, of course, the risk in those holdings is all too apparent. But employee-benefit experts say that Marsh may be putting its 60,000 employees at additional risk, even as it enriches itself, by limiting the alternative investments to mutual funds that are for the most part managed by its Putnam Investments subsidiary.
“Fiduciaries of 401(k) plans are charged with making decisions that are in the best interests of the participants in the plan,” said Edward A. H. Siedle, a former Securities and Exchange Commission lawyer who is president of the Center for Investment Management Investigations, a unit of the Benchmark Companies in Ocean Ridge, Fla., that investigates money management abuses on behalf of pensions.
“When they are also employees of a money management company that gets hired by the plan there is a conflict of interest. This is especially problematic when the money manager is a high-cost, poor performer.”...
Given that the company is in the financial services industry it is perhaps not surprising that workers at Marsh & McLennan and its subsidiaries have been given many opportunities to buy their company’s stock or its money management services. There is a pension plan, a stock purchase plan, 401(k) accounts, stock option grants and a cash bonus deferral plan to name a few. And in all cases, Marsh stock or Putnam funds dominate the offerings.
Sadly for these employees, Marsh shares have gone pretty much straight down since Mr. Spitzer filed his lawsuit against the company, contending that bid-rigging and other improprieties occurred in Marsh’s insurance brokerage unit.
Yesterday, Marsh stock fell another $1.47 a share, or 5.7 percent; it closed at $24.10 and has lost 48 percent since Mr. Spitzer filed the suit.
Workers who have participated in the Marsh stock purchase plan have taken perhaps the biggest brunt of this slide. Last year, 3.8 million shares were bought in the stock plan, well above the 2.85 million Marsh shares purchased in the plan in 2001. And employees working in the company’s international division, which is broken out separately, bought 1.2 million shares in 2003, far more that the 717,000 shares they purchased during the previous year.
Taken together, the shares bought by employees in the Marsh stock purchase plan amounted to five million shares, or almost 1 percent of the 533 million shares outstanding at the company at the end of last year.
Marsh employees have also bought their company’s stock aggressively in various 401(k) plans, a decision they now almost certainly rue. According to Marsh filings, at the end of last year, a defined-contribution plan for Marsh & McLennan employees has assets of $2.4 billion.
Almost 60 percent of the plan’s assets were in Marsh stock - $1.3 billion worth.
Another $938 million in the plan was in funds managed by, you guessed it, Putnam Investments. Of the 17 fund choices on the plan’s menu, 10 are Putnam Funds....
At Putnam Investments, employees have their own 401(k), with assets of $441 million at the end of last year. As is typical in such accounts, Putnam employees can invest their contributions, and any that are matched by the company, in a variety of investment options.
One of those options is Marsh stock and as of December 2003, Putnam employees held 344,000 shares with a value of $16.5 million, or $47.96 a share. Those shares, if they are still in the plan, have been cut in half....
Most peculiar, the Putnam 401(k) plan offers no low-cost index funds intended to mimic the performance of a broad market average, like the Standard & Poor’s 500 index. Such funds are usually ubiquitous in 401(k) plans. Mr. Siedle said such an omission at any plan was “an invitatation to litigation.”...
Trustees of the 401(k) plan for Putnam employees are Francis N. Bonsignore, senior vice president for executive resources and development at Marsh & McLennan, and Sandra S. Wijnberg, the company’s chief financial officer. They have a fiduciary duty to plan participants to provide the best array of investment options. But as Marsh executives, they may be tempted to benefit their company by propelling their workers into Putnam funds. The Marsh spokeswoman declined to comment of the trustees.
About the only Marsh employee plan not holding Marsh stock is the defined-benefit pension plan, which had $2.4 billion in assets as of last December. Employees in this plan do not choose the investments; money managers oversee the money.
But it is in the selection of those money managers that Marsh may be putting its interests ahead of its employees. Of the $2.4 billion under management, $1.8 billion is overseen by Putnam. And, adding to the potential for conflicts, the pension plan employs as an investment consultant Mercer Inc., the Marsh subsidiary that helps pension funds decide which money managers to hire.
Given Mercer’s role as a consultant, it is troubling but perhaps surprising that so much of the Marsh pension plan would be managed by Putnam.
www.nytimes.com/2004/10/20/business/20place.html
~ ~ ~
- For more, GO TO > > > The Marsh Birds
Merrill Lynch - From ctnow.com, 10/21/99: Top Politicians Linked To Pension Fund Deals. State Treasurer Denise Nappier shone the light Wednesday on seldom-seen machinations that have put millions into the pockets of well-connected “finders” in state pension investment deals— and some of the state’s best-known politicians were caught in the glare....
Paul Silvester has told the authorities, in a secret statement still under court seal, that [former state Senate leader William] DiBella introduced him to Joseph Grano, an old DiBella friend from Hartford’s South End who is president of Paine Webber. After Silvester agreed to invest $200 million with Paine Webber last year, DiBella told Silvester that the company had refused to pay him a fee.
When Grano asked Silvester if there was another way to help DiBella, Silvester said, Silvester turned to Frederic V. Malek, the chairman of Thayer Capital Partners, which received a $75 million state investment commitment last October. Malek allegedly told Silvester that Thayer used Merrill Lynch as an exclusive placement agent, and that the only possibility to compensate DiBella would be if Merrill Lynch would forgo some of its fee.
In its disclosure to Nappier this week, Thayer reported that it did, in fact, agree to pay a $374,500 fee to a firm called North Cove Ventures, which Nappier’s office identified as “William DiBella” when it released its compilation of the disclosures...
Thayer also paid a $1.1 million placement fee to Merrill Lynch, according to the disclosure....
For more, GO TO > > > Beware! This Bull is for The Birds!
Morgan Stanley - From F.I.A.S.C.O., by Frank Partnoy –
Blood in the Water
on Wall Street
From 1993 to 1995, I sold derivatives on Wall Street. During that time, the seventy or so people I worked with in the derivatives group at Morgan Stanley in New York, London, and Tokyo generated total fees of about $1 billion–an average of almost $15 million a person.
We were arguably the most profitable group of people in the world....
The managers in my group received millions and millions in bonuses; even our lowest level employees had six-figure incomes. And many of us, including me, were still in our twenties....
Other banks–including First Boston, where I worked before I joined Morgan Stanley–could not match Morgan Stanley’s aggressive new sales tactics. By every measure the firm had been recast....
Aggressive business practices inspired a new credo: “First class business in a second class way.” After decades of politesse, there were savages at Morgan Stanley.
The derivatives group received its marching orders from the firm’s leader, John Mack. Mack had worked his way up from the depths of the trading floor, where he still was known as “Mack the Knife.” On his desk, Mack kept a large metal spike, upon which, it was rumored, he would threaten to impale inept employees....
Following Mack’s lead, my ingenious bosses became feral multimillionaires: half geek, half wolf. When they weren’t performing complex computer calculations, they were screaming about how they were going to “rip someone’s face off” or “blow someone up.” Outside of work they honed their killer instincts at private skeet-shooting clubs, on safaris and dove hunts in Africa and South America, and at the most important and appropriately named competitive event at Morgan Stanley: the Fixed Income Annual Sporting Clays Outing – F.I.A.S.C.O. for short.
The annual skeet-shooting tournament set the mood for the firm’s barbarous approach to its clients’ increasing derivatives losses. After April 1994, when these losses began to increase, John Mack’s instructions were clear:
“There’s blood in the water. Let’s go kill someone.”
We were prepared to kill someone, and we did. The battlefields of the derivatives world are littered with our victims. As you may have read in the newspapers, at Orange County and Barings Bank and Daiwa Bank and Sumitomo Corporation and perhaps others no one knows about yet, a single person lost more than a billion dollars.
At some companies it took more than one person to lose a billion dollars. Dozens of household names, including Procter & Gamble and numerous mutual funds, lost hundreds of millions each, billions total, on derivatives. The $50 billion Mexican currency debacle included its share of derivatives victims, too....
If you owned stocks or mutual funds during the past few years, a portion of the real money lost on derivatives very likely was yours.
Derivatives have become the largest market in the world. The size of the derivatives market, estimated at $55 trillion in 1996, is double the value of all U.S. stocks and more than ten times the entire U.S. national debt.
Meanwhile, derivative losses continue to multiply....
~ ~ ~
From the Epilogue: What lessons did I draw from my experience selling derivatives? I believe derivatives are the most recent example of a basic theme in the history of finance: Wall Street bilks Main Street.
Since the introduction of money thousands of years ago, financial intermediaries with more information have been taking advantage of lenders and borrowers with less....
If anything, the financial-services industry is flourishing, despite the recent scandals, and bankers continue to capture the information advantage. Investment banks’ recent appetite for mutual funds is telling.
Morgan Stanley, not content to sell sophisticated financial instruments to insurance companies and state pension funds, is now seeking out even less-sophisticated investors – you, for example – by agreeing to merge with Dean Witter.
Other banks are engaging in similar mergers or cooperative agreements. Dean Witter’s huge U.S. retail client base will be fish in a barrel for Morgan Stanley’s marksmen. That merger – and similar combinations sure to follow – will create more profit opportunities for derivatives salesmen, more dangers for investors, and, if the dozens of derivatives victims in recent years are at all representative, more blood.
That, too, will mean more money for Morgan Stanley....
For more, GO TO > > > Wall Street
New York City - From “Enron Exposed!”, by American Media Specials, Inc.: . . .
LIFE SAVINGS LOST
Bonuses for top officials at Enron depended on the company’s earnings, and in some cases, on the price of the stock. Court documents accuse Enron executives of cooking the books to create the illusion that the company was doing better than it was.
From 1997 through 2000, Enron hid its high level of debt while misstating profits. Late last year, the company had to erase $1.2 billion of shareholder equity. Lay, Skilling and others received increasing amounts of sharaes to sell to the public, as they were able to levitate the price of the stock....
Between 1997 and Enron’s bankruptcy last year, Lay sold his insider shares for $101 million and was paid more than $14 million in salary.
It must be remembered that when someone sells shares of stock, there is a buyer on the other side of that transaction. While Lay was selling his shares, the New York City pension fund lost $109 million from Enron shares it bought.
Some of that money belonged to the New York City firemen’s pension fund and would have gone to the widows and orphans of the 343 New York City firemen murdered by terrorists on 9/11....
For more, GO TO > > > The Story of Enron
New York State Retirement Fund - Join the discussion in >>> The Catbird’s Forum.
New York Life Insurance Company - From When Corporations Rule the World, by David C. Korten:
On ... June 15, 2000, The New York Times reported . . . “Top executives of the New York Life Insurance Company were accused in a racketeering lawsuit yesterday of enriching themselves by charging tens of millions of dollars in excess fees to the retirement plans that the insurer maintains for its workers and agents.”
Nomura Securities Group - From Sydney Morning Herald - 12/11/98 by Ben Hills.
The Financial Monster That
Tried to Eat Australia
The world’s oldest and largest financial conglomerate broke the law when it attempted to ambush the Australian Stock Exchange and wipe $15 billion off the value of Australia’s public companies, the Federal Court ruled yesterday....
Justice Ronald Sackville found, “Nomura engaged in deliberately misleading conduct designed to achieve illegitimate ends.”
Nomura International is a division of the scandal-plagued, Tokyo-based Nomura Securities Group, founded in 1872, which has $151 billion in assets....
The verdict is expected to trigger action against Nomura in the two cities from which the “sting” was organised — London, and in Hong Kong where legal action has been launched by the local securities regulators.
The decision followed a trail that ran for 16 days in the Federal Court and involved millions of documents, electronic records, and taped telephone calls. It represents a major victory for the ASIC....
Mr. Cameron said it was a “landmark” decision that “...will help establish the boundaries of acceptable trading strategies not only in Australian boundaries but also for players in the international securities and futures markets.”
The case focused on the drama of March 28, 1996, when Nomura tried to destroy billions of dollars of the value of the Australian Stock Exchange by dumping a portfolio of shares worth $600 million — more than the normal total daily turnover — in the closing minutes of trading.
The court was told that Nomura executives and traders in London and Hong Kong laughed and joked about what they were doing as they faxed instructions to 10 different brokers, hoping to drive the stock exchange’s All Ordinaries index of 353 stocks down by as much as 10 per cent.
This would have destroyed $15 billion of the value of Australia’s major public companies, with devastating consequences to pension funds and hundreds of thousands of individual shareholders....
This is the latest of a series of adverse findings against the world’s largest stockbroker. In June last year, the Tokyo District Prosecutors’ office filed charges against the company and two former managing directors accusing them of paying a sokaiya (racketeer) $625,000 to ensure that a shareholders’ meeting was not disrupted. The company was also banned from trading on its own account on the Tokyo Stock Exchange for four months for compensating a gangster for trading losses.
In July last year, Nomura agreed to pay $94 million to Orange County, south of Los Angeles, in settlement of an action over the biggest bankruptcy in US municipal history.
Nomura was one of the brokers the county used in gambling on high-risk securities which cost it nearly $3 billion....
* * *
kaleido.smn, 9/23/96, by Ito Hirotoshi: Nomura Securities: Another payoff scandal, yet not widely reported —
Even though several evening papers and local newspapers have reported it and the securities industry has been shaken, there is a grave problem the public is not aware of because the mainstream media, i.e., national dailies and TV networks, have not reported it.
The matter involves payoffs by Nomura Securities to big-shot “sokaiya.”
Sokaiya are extortionists who specialize in purchasing shares in large companies, thereby earning the right to attend annual stockholders meetings, which they threaten to disrupt unless they are paid off. Sokaiya evolved from thugs hired to prevent criticism of the company from ordinary shareholders during annual meetings.
The allegations against Nomura Securities include that it opened an account for a dummy company owned by a big-shot sokiya called “K.” Apparently Nomura had discretionary control over the account and made sure that it generated profits. Paying sokaiya off is against Commercial Law . . . Furthermore, managing client’s accounts with discretionary powers is against the Securities and Exchange Act....
Hundreds of millions of yen for the den.
Nomura Securities is the largest securities firm in Japan. The Nomura annual stockholders meeting was initially controlled by the late right-wing bigwig Kodama Yoshio. When Kodama died, his disciple in the sokaiya industry, Uemori Kotetsu, took the business over and conducted a typically perfunctory shareholders meeting. Uemori himself died around five years ago, and K became his successor....
Nomura paid him off, it seems, as follows:
The dummy company mentioned above is a real estate company called “S,” managed by K’s kid brother. In Nov 1994, S opened an account with Nomura Securities and deposited 500 million yen. Nomura invested this money not only in promising stocks, but also high-risk, high-return products such as warrant bonds and futures, and allegedly generated profits of several hundred million yen per annum. . . .
The unrepentant bookie of the gambling den.
The Securities and Exchange Commission has already commenced discreet investigations this spring. . . . In June 1993, a scandal in the securities industry broke when it was revealed that only high-roller investors were being compensated for their losses in the stock market. This scandal showed that the Japanese stock market was a gambling den where Nomura had effective control over the market and could weigh the odds in favor of clients for whom it chose to do so.
Public confidence in the securities industry plummeted, and Tabuchi Setsuya, then chairman of Nomura Securities and known as the “Don of the securities industry,” resigned and withdrew from all official duties. But we now know that just one year later Nomura was not only illegally paying off a sokaiya, but was in fact using the stock market to generate profits.
All the repentance was only a show, and it is clear that Nomura is still the bookmaker presiding over the gambling den.
It is also suspected that the profits from the S account were also distributed to other sokaiya via K. In any case, confidence in the Japanese stock market will indubitably drop even further and share prices will fall once this incident breaks into the open.
* * *
Honolulu Star-Bulletin, 3/18/97 — California Pension Fund Dropping Nomura —
The California Public Employees Retirement System, the nation’s largest public pension fund, said it will cease dealing with Japan’s scandal-plagued Nomura Securities Co. The $110 billion pension fund, known as CalPERS, also said it will begin to manage more of its own domestic funds rather than rely on outside managers.
Nomura has been tainted by alleged illegal stock transactions on behalf of a racketeering group....
Nomura Capital Management Inc., a unit of Nomura Securities, manages $185 million for the $7 billion Hawaii Employees’ Retirement System. Stanley Siu, the ERS’ administrator, said last week that he had been assured by Nomura that questionable trades do not involve ERS investments....* * *
Nando.net (AP), 11/30/97: Japan Faces Corporate Racketeering Scandal — A century-old brokerage is in ruins, some of Japan’s most respected companies have been shamed, and dozens of executives are behind bars. This week, all eyes will be on the trial of Ryuichi Koike, the man at the center of the storm.
Koike, 54, on Tuesday faces charges he received millions of dollars in bribes as a “sokaiya,” a mob-connected extortionist who threatens to disrupt shareholders’ meetings unless paid off.
The case has damaged the credibility — and stock prices — of some of Japan’s top companies, led to the arrest of corporate executives and become a symbol of the rot at the center of the Japanese financial world....
Koike, who allegedly worked with his brother Yoshinori, is accused of receiving $5.5 million in payoffs from Japan’s top four brokerages. Dai-Ichi Kangyo Bank — one of the world’s largest banks — allegedly made him a shady loan of $92.1 million. Dozens of corporate officials have been arrested in the case....
Just this week, 100-year-old Yamaichi Securities, the nation’s fourth largest brokerage, went belly up after its role in the scandal sapped what was left of its sagging credibility and clobbered its share prices.
Days ago, four Daiwa Securities Co. officials were arrested under suspicion of links to Koike. And in July, the government forced Nomura Securities — Japan’s largest brokerage — and Dai-Ichi Kangyo to shut down key operations until the end of the year after the payoffs came to light.
In separate cases, police have arrested Mitsubishi Motors Corp. executives on charges of making illegal payoffs to other racketeers, and companies in the Mitsubishi and Hitachi groups have been implicated in similar cases....
There are about 1,100 sokaiya still operating in Japan. About 30 are arrested each year and penalties are light. Convictions are punishable by up to six months in jail or $2,600 in fines. . . .
~ ~ ~
Catbird Comment: Note the dates on the above revelations— 9/23/96; 3/18/97; 11/30/97 and 12/11/98— then take careful note of the dates in the following article.
~ ~ ~
From Wharton Ethics Program:
The House of Nomura and the
Japanese Securities Scandals
“I sincerely apologize to the public and the nation’s investors for the trouble caused ... I am responsible for the firm’s actions. ... Employees in the future will strictly abide by ethical rules.” — Setsuya Tabuchi, Chairman of Nomura Securities (June 20, 1991)
These shocking statements of contrition and admission were in response to the revelation that one of the world’s most powerful securities houses had been “caught red handed, offering illicit compensation to institutional clients, laundering money for yakuza (the Japanese Mafia) and encouraging stock speculation.
Nomura and three other members of the “Big Four” securities firms in Japan (Daiwa, Nikko, Yamaichi) were ultimately accused of a plethora of improper activities, which also included tax evasion, ignoring the Ministry of Finance (MOF) directives, succumbing to extortionists, and misusing confidential information.
On Oct 8, 1991, the MOF announced penalties against the Big Four. Nomura was banned from brokering equities in 86 offices and branches for one month, starting Oct 15, 1991....
A month later, the Japanese Fair Trade Commission (JFTC) publicized the results of its investigation of the scandals and issued decrees against the Big Four, ordering them to promise never to compensate clients for losses again. The JFTC also clearly stated its position that similar offenses in the future would lead to criminal sanctions....
The Big Four signed consent decrees with the JFTC in December, 1991....
Yoshihisa Tabuchi resigned as president in late June, 1991 ... and Setsuya Tabuchi resigned as both chairman of Nomura and vice chairman of Keidanren (The Japanese Federation of Economic Organizations)....
Thirty-two senior Nomura officers were fired, and several others demoted, while the pay of those executives who remained was slashed by as much as 30%....
For more, GO TO > > > Wall Street
Ohio State Pension Fund - From “Enron Exposed!”, by American Media Specials, Inc.: . . .
LIFE SAVINGS LOST
The Ohio State Pension Fund lost $114 million in the Enron debacle.
For more, GO TO > > > The Story of Enron
Prudential - A huge nest on shaky ground.
From the Lieff Cabraser Heimann &, LLP website on 01/25/03:
PRUDENTIAL INSURANCE RETIRED EMPLOYEES
PENSION PLAN LAWSUIT
In a class action lawsuit, entitled Dupree, etal. v. The Prudential Insurance Co., et al., No 99-8337-CIV (AJJ) S.D. Fla.), Lieff Cabraser Heimann & Bernstein, LLP, represents a group of retired employees of Prudential who are participants in Prudential’s Retirement Plan. The Plan provides pension benefits to thousands of retirees who used to work for Prudential. Those benefits are protected by federal statute called the Employee Retirement Income Security Act (ERISA), which was enacted by Congress to prevent employers from exercising improper control over the assets of their retirement plans.
The plaintiff retires allege that Prudential violated ERISA by using (and continuing to use) the Retirement Plan’s assets to benefit Prudential, instead of its retirees. Plaintiffs’ claims have survived two motions to dismiss, and discovery is ongoing. The case is set for trial in June 2003....
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Saving a few million dollars in taxes or swapping contributions with another charity is small potatoes compared to the con game John G. Bennett Jr. ran in Philadelphia.
Bennett founded the Foundation for New Era Philanthropy in 1989; a few years later, he said his organization would help fellow nonprofit groups prosper through the donations of “anonymous benefactors,” with the promise of doubling within six months any amount a group sent to him.. A charity that paid Bennett’s group $1 million would soon be paid $2 million, thanks to Bennett’s roster of wealthy donors who wished to make their gifts in secret.
For a time, Bennett was the toast of his city, drawing accolades from the local press for his charitable works....
While he was praised for bringing a religious fervor to his fundraising, Bennett was actually running an elaborate pyramid scheme. He told the charities he suckered that New Era had a board of directors, and that their contributions were being held in a “quasi-escrow” account at Prudential Securities. In fact, Bennett was the sole director of New Era, and the donations were being used to secure a loan Prudential made to him.
As for the wealthy philanthropists who wished to remain anonymous– the Inquirer reported that Bennett kept the names of all 125 of them locked in a safe-deposit box – there were none. Just as in the original Ponzi scheme, Bennett made good on his promises to his earlier “investors” by paying them off with money he raised from the newcomers.
In the end, his foundation bilked $135 million out of more than 500 charitable groups....
When New Era filed for bankruptcy protection in May 1995, it reported only $80 million in assets and more than $550 million in debts owed to the various charitable groups that had given it their money. While Bennett was in court facing multiple federal charges, the court-appointed bankruptcy trustee for New Era reached a settlement with the defrauded charities to repay a portion of their lost contributions.
Prudential also settled before the charities could bring a suit, agreeing to pay $18 million for its role in the scandal.
In 1996, Bennett was indicted on charges of mail, bank, and wire fraud, money laundering; tax evasion; and making false statements to the government. Federal investigators charged that Bennett had diverted hundreds of millions of dollars from charities to his personal businesses rather than depositing the money in escrow accounts or investing it in low-risk government securities, as he had promised to do. . . . He pleaded no contest and was sentenced to 12 years in federal prison.
Bennett’s case may be extreme, but it’s by no means the only example of an individual spending money destined for the public good on his own private interests. While most tax-exempt groups follow the rules and exist for charitable or educational purposes, the IRS recognizes that nonprofit abuse is an emerging issue.
“The large amount of money involved in employee plan trust funds and tax-exempt organizations provides both a temptation and an opportunity for fraud,” the Service noted in a 1999 publication....
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For more, GO TO > > > Prudential: A Nest on Shaky Ground; Kamehameha Schools Pension Plan
Thayer Capital Partners - A private equity investment fund where some very big birds nest – possibly with YOUR pension nest egg.
June 29, 1998
Thayer Capital Partners Makes Its Mark as a New Player Among Old-Time Investment Firms
By Jerry Knight, Washington Post
In an office 31 floors above Park Avenue in New York, a congregation of executives, lawyers and investment bankers is scheduled tomorrow to perform a ritual symbolic of contemporary business trends: the marriage of two companies.
If all goes as planned, three hours of voting and affirming, signing and witnessing will join together the two telemarketing firms to create Aegis Communications Inc., a $230 million-a-year business that will have 8,500 employees, offices in 30 cities and shares traded on the Nasdaq Stock Market.
Playing matchmaker, as well as mother of the bride and dowry donor, is Thayer Capital Partners, Washington's newest player in the big-money private investment business.
Two-year-old Thayer is the newest of the financial powerhouses that have emerged in Washington in the past five years as the mid-Atlantic region has grown into a world-class player in finance and technology.
Washington's "old money" institutions, symbolized by Fannie Mae and Freddie Mac, has been joined by a clique of newcomers, including Friedman, Billings, Ramsey Group Inc. of Arlington, one of the nation's largest underwriters of new stock offerings; J.E. Robert Co. of McLean, a real estate investment empire soon to expand into Asia; and Carlyle Group, the merchant banking firm that Thayer resembles on a smaller scale.
Thayer, bankrolled by two dozen banks, pension funds and financial institutions that put up $364 million in capital, has invested in businesses as varied as mail-order meat sales, multinational bicycle manufacturing, travel wholesalers and telemarketing.
Almost $40 million has gone into the Aegis telemarketing group, one of several Thayer investments that are turning the crucial corner from private ownership to publicly financed companies, allowing Thayer to convert its equity in the private companies into stocks that can be sold.
One of Thayer's eight portfolio firms, meat marketer Colorado Prime Foods, has produced no gains after a year, a disappointment in a business in which investors demand a quick payback. Two other deals have been done in the past few weeks, but its earlier investments are on the fast track:
Aegis, an unusual "reverse IPO" in which a large privately held Los Angeles-based company backed by Thayer will go public by merging with a smaller, Dallas company listed on Nasdaq. Thayer will end up owning about 38 percent of the stock of the companies that handle phone inquiries for client companies and make telephone sales calls.
Global Vacation Group Inc., a Washington-based travel wholesaler that is planning a conventional IPO later this summer to raise $63 million.
Derby Cycle Corp., with headquarters in Nottingham, England, raised $160 million last month by selling bonds in the United States and Germany.
Software AG Systems Inc. of Reston -- which has given Thayer the kind of home run that big investors often long for but rarely hit. The $29.7 million investment was worth more than $460 million after Software AG stock soared to a record $32.25 Friday.
Based on its track record with those companies, Thayer is talking to institutional investors that put money into its first fund about raising a second pool of capital. With this funding, the firm would have as much as $1 billion to make more investments.
Big-League Lineup
Though Thayer has been in business in its existing form for only a little more than two years, Thayer's players are three longtime starters in the big leagues of business:
Company founder Fred Malek, 62, who first made a name in Washington as a top aide to President Richard M. Nixon. Malek went on to become president of Marriott Corp. of Bethesda and then was president of Northwest Airlines after leading a buyout of that company with fellow Marriott alumni Al Cecchi and Gary Wilson.
Malek led a management buyout of CB Commercial Real Estate Group, then returned to the hotel business, forming a pair of hotel investment partnerships and arranging a buyout of the Ritz-Carlton hotels in partnership with Marriott.
Paul G. Stern, 59, was a top corporate manager before he got into the buyout business as a partner in Forstmann Little & Co. in 1993. By then his resume listed stints as chairman of Braun AG in Germany, vice president for strategic planning and acquisitions of Rockwell International Corp. and president of Burroughs Corp. He spent four years as chairman of Canada's Northern Telecom Ltd. before joining Forstmann.
Rick Rickertsen, 38, hooked up with Malek in 1994 after working at Hancock Park Associates, a Los Angeles venture capital and buyout firm and Brentwood Associates, the biggest venture capital investor in Southern California. He worked on Thayer's two hotel funds and the Ritz-Carlton transaction. He also has coordinated fund-raising for Thayer Equity Investors III, the partnership behind the company's current deals.
The principals are backed by a coterie of apprentice dealmakers -- half a dozen Harvard MBAs -- a small support staff and a heavyweight advisory board that includes Washington power lawyer Vernon Jordan; former vice presidential nominee Jack Kemp; Frank Zarb, chairman of the National Association of Securities Dealers; Jim Robinson, former chairman of American Express Co.; and Drew Lewis, former transportation secretary and current chairman of Union Pacific Corp.
"Fred Malek is the driving force. He has built a very fine and very focused organization," said Ed Mathias, a principal at Carlyle Group, Washington's bigger and better-known buyout firm. Malek and Stern have the management experience and worldwide contacts essential for success in the relationship-based business, he said, while Rickertsen "is the right age and the right kind of guy" to complement the two veterans.
"With the people they have now and the results they have shown, they should be able to raise a sizable amount of money," Mathias said.
Target Return: 30 Percent
Though they are in the same business, Thayer and Carlyle do not compete directly for deals or financing. Much of Carlyle's funding comes from overseas and is focused on bigger deals and venture capital, which are not part of Thayer's strategy.
In the taxonomy of finance, Thayer Capital Partners is classified as a private equity investment firm, which means it generally invests in privately owned companies rather than publicly traded companies. It also is considered a leveraged buyout firm because, in addition to its own capital, it uses borrowed money to finance transactions.
The money that Thayer invests comes from two dozen investors, most of them institutions.
More ambitious profit goals.
Thayer's target is a return on investment of 30 percent a year, a goal the company told investors two years Backers include the pension funds of AT&T Corp., Boeing Co., Textron Inc. and Aluminum Co. of America; Howard Hughes Medical Institute; Hawaii's Bishop Estate; Travelers Insurance Co. (now owned by Citigroup); CreditSuisse First Boston; Bank of Nova Scotia; and Dresdner Bank.
There also is one individual investor -- Roger Penske, the race car driver turned truck and transportation magnate.
Pension funds put most of their money into conservative investments intended to produce a return with little risk, but they usually allocate a small part of their cash to venture capital and buyout funds with ago when it set out to raise its pool of capital. The original plan was to raise $250 million -- enough to finance a dozen or so of what are considered medium-sized deals these days -- but eager investors pledged $364 million. The fund is officially named Thayer Equity Investors III LP. Thayer I and Thayer II are a pair of hotel real estate partnerships set up previously by Malek and named for one of his favorite figures, Col. Sylvannus Thayer, the father of West Point, Malek's alma mater.
Thayer's three partners also put their own money into the company's deals so they can share directly in the profit. But the primary source of the company's earnings is based on what is considered the standard formula for the industry: Thayer gets 20 percent of the profit it generates, after expenses.
"The key to our business is to make a good rate of return for our partners," Rickertsen said. Investors measure performance as internal rate of return -- how much they make on their original investment every year. The longer a transaction takes to produce a profit, the more money the partners expect, he said. "The IRR clock is vicious. Time is very, very critical."
To boost the return Thayer borrows money -- using "leverage," in financial jargon.
"Our style is to use debt and equity in every deal," Malek said. If you spend $100 million to buy a business and sell it a year later for $150 million, you earn a 50 percent profit on your investment, he said. But if you put up $25 million of your own cash and borrow the rest, you double your money -- for a 100 percent return.
"Our objective is to put a fairly sizable amount, but a prudent amount, of leverage into the transactions," Malek said, stressing "prudent." In the 1980s, buyout firms like Thayer often had only 8 percent to 10 percent equity in their investments, he said. Today Thayer's capital structure typically includes one-third equity, two-thirds debt.
But in practice, the structure of Thayer's investments is much more complicated than simply buying stock and borrowing money. The prospectuses of Thayer companies selling stock to the public are replete with multiple classes of shares, convertible preferred stocks and other exotic securities, often engineered by Rickertsen.
For example, Thayer made its investment in one company half in common stock and half in convertible preferred stock, paying a deferred dividend of 20 percent a year. If the value of the company's stock increases as hoped, Thayer will pass up the dividends, convert the preferred to common and sell it for a big gain. If that doesn't happen, the dividend provides downside protection.
While the kind of investing Thayer does can be risky, Rickertsen acknowledged, it's not as risky as venture capital. Investors expect to lose the venture capital they put into some start-up companies -- and routinely do. Thayer, instead, invests in companies with assets that can be sold and cash flow that can be tapped to repay investors. The worst that can usually happen is that Thayer will get all or most of its money back. It won't make a profit, but it won't be wiped out....
Software AG Germany agreed to sell the U.S. division for $85 million in cash plus a 24 percent royalty on sales of its software. Thayer put $29 million of its own cash into the company, borrowed the rest and completed the buyout in April 1997.
Hoping to take advantage of the hot IPO market and cash out quickly, Thayer brought in BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette to underwrite a stock offering.
The timing turned out to be terrible. Software AG began its roadshow for investors last Oct. 27, the day the Dow Jones industrial average fell more than 500 points because of financial turmoil in Asia.
Instead of $14 a share, for which Software AG had hoped to sell stock, the company had to settle for $10 a share. That was enough, though, for Thayer's investors to recoup their entire original investment -- and retain a 59 percent stake in the company.
After doubling its profit, Software AG went back to the market last month and sold its stock for $24.25 a share. Thayer sold enough shares to pay $115 million to its investors and still keep 10.8 million shares worth about $345 million at current prices.
"It's been a great deal for everyone," said Software AG President Gillis -- everyone including Gillis. Before the Thayer-backed buyout, he was an employee, albeit an employee earning almost half a million dollars a year. He sold $4.8 million worth of stock in the May offering and still owns or has options to buy more than 2 million shares.
That's a $60 million nest egg that Thayer would be more than happy to help him invest....
For more, GO TO > > > A Connecticut Yankee in King Kamehameha’s Court; Birds that Drink from Cesspools;