THE GREAT NEST
- PART I -
Sightings from The Catbird Seat
~ o ~
June 15, 2009
AIG lawyer: Ex-top
By MADLEN READ, AP Business Writer Madlen Read
NEW YORK – The former top executive of American International Group Inc.
plundered an AIG retirement program of billions of dollars because he was angry at
being forced out of the company, a lawyer for AIG told jurors Monday at the start of a
Attorney Theodore Wells told the jury in Manhattan that former AIG Chief Executive
Officer Maurice "Hank" Greenberg improperly took $4.3 billion in stock from the
company in 2005, after he was ousted by the company amid investigations of
"Hank Greenberg was mad. He was angry," Wells said in U.S. District Court of the
emotional state of the man who, over a 35-year-career, built AIG from a small company
into the world's largest insurance company.
Wells said that Greenberg, within weeks of being forced out in mid-2005, gave the go-ahead for tens of millions of shares to be sold from a trust fund. The fund was set up to
provide incentive bonuses to a select group of AIG management and highly
compensated employees that they would receive upon their retirement.
Greenberg, 84, has contended through his lawyers that he had the right to sell the
shares because they were owned by Starr International, a privately held company he
Starr International was named after Cornelius Vander Starr, who created a worldwide
network of insurance companies in the early 1900s.
AIG maintains that Starr and Greenberg, his protege and successor, decided in the late
1960s to organize the various companies under one holding company, AIG.
Starr International remained a private company and its shareholders decided in 1970
that the amount that its shares of AIG were worth above book value of about $110
million should be used to compensate AIG employees, AIG has said.
The embattled insurer is trying to reclaim the money from Starr it says was wrongly
pocketed through stock sales by Greenberg.
February 24, 2009
Delphi wins right to cut
NEW YORK (Reuters)—A U.S. judge on Tuesday provisionally granted bankrupt car
parts maker Delphi Corp. permission to end health care and life insurance
benefits for its retired salaried workers as of April.
Delphi sought relief from the benefits, which cost it more than $70 million per year,
according to court documents. Those benefits amount to liabilities of more than $1.1
billion on its balance sheet.
Citing Delphi's need to conserve liquidity, U.S. Bankruptcy Judge Robert Drain of the
Southern District of New York said that the company had waited for a sufficient time
before seeking to suspend the benefits.
Delphi, which filed for Chapter 11 in 2005, has had complications with its exit financing
over the last year and recently said former parent General Motors Corp. was in talks to
buy back parts of the company.
Lawyers for about 15,000 salaried retirees had argued that parts of the U.S.
Bankruptcy code limited the ability of a debtor in possession to modify retiree benefits,
but Delphi countered that those benefits are provided "at will."
Judge Drain ruled that the code only applied when retirees could prove they have a
guaranteed right to those benefits.
Troy, Mich.-based Delphi also sought to stop providing similar benefits to future salaried
retirees and post-retirement life insurance benefits to its current and future retirees.
Judge Drain ordered the creation of a committee to see whether any group of
employees may be vested in the plans and have guaranteed rights to the benefits.
He granted the committee a budget of $200,000 and set a hearing date of March 11 for
it to present its results.
"The consequence of the court being wrong is pretty serious," Judge Drain said.
"No company is ever satisfied with having to cut benefits," said Jack Butler, Delphi's
bankruptcy lawyer. "But we appreciate the judge concurring with our business
Delphi was one of several U.S. auto parts companies to file for bankruptcy from 2004 to
2006 and has cut thousands of jobs to cope with the declining market share of General
Motors, which spun it off in 1999 and is still its biggest customer.
Delphi and other auto parts makers are under intense pressure after steep production
cuts from all three U.S. automakers. In early February, Delphi warned that the value of
its business would be substantially below the $6.3 billion it had estimated in October.
U.S. auto sales plunged 18% to 13.2 million vehicles in 2008. Analysts say the market
is certain to fall further in 2009 after January sales plunged to a 27-year low.
The case is In re: Delphi Corp et al, U.S. Bankruptcy Court, Southern District of New
York, No. 05-44481.
* * *
Judge Robert D. Drain
Robert Drain is a United States Bankruptcy Judge for the Southern District of New York.
Judge Drain earned his B.A. degree cum laude from Yale University in 1979 and his
J.D. degree in 1984 from Columbia University School of Law, where he was a Harlan
Fiske Stone Scholar for three years.
At the time of his judicial appointment in 2002 he was a partner in the New York law
firm of Paul, Weiss, Rifkind, Wharton and Garrison. Judge Drain has practiced
bankruptcy law from the beginning of his career, first with the New York firm of Milbank,
Tweed, Hadley & McCloy and then at Paul, Weiss, where, in Chapter 11 cases,
restructurings and litigation, he represented debtors, trustees, creditors, creditors’
committees, and buyers of distressed businesses. He was active in transnational
insolvency matters and in the area of bankruptcy acquisitions.
Judge Drain is a member of the American Bankruptcy Institute and the Association of
the Bar of the City of New York, where he was a past secretary of its Committee on
Bankruptcy and Corporate Reorganization, the National Conference of Bankruptcy
Judges, and the International Insolvency Institute. He has lectured and written articles
on numerous bankruptcy-related topics and is an adjunct professor at St. John's
University Law School
* * *
Paul, Weiss, Rifkind, Wharton & Garrison LLP is a firm of more than 500
lawyers, with diverse backgrounds, personalities, ideas and interests, who collaborate
with clients to help them conquer their most critical legal challenges and business
goals. Our long-standing clients include many of the largest publicly and privately held
corporations and financial institutions in the United States and throughout the world....
Bankruptcy & Corporate Reorganization
Paul, Weiss offers full-service bankruptcy and reorganization capabilities that clients
call upon to resolve their most complex restructuring and insolvency situations....
The firm has played key roles in many of the major cases that grabbed the headlines
over the past several years as businesses and investors worldwide faced rapid market
and regulatory transformation....
Paul, Weiss has handled numerous representations of official or unofficial creditors’
committees in many of the largest bankruptcies and out-of-court workouts of recent
years. These include the following:
GM and GMAC bondholder groups.
An unofficial noteholder committee of Charter Communications.
The ad hoc committee of bondholders of Quebecor, a multi-national printing
company. Quebecor is the subject of CCAA proceedings in Montreal and chapter
11 cases in New York.
An ad hoc committee of bank counterparties holding multi-billion dollar financial
guaranty claims against a monoline insurer.
The unofficial committee of second-lien debtholders in the chapter 11 case of
Calpine Corporation, an electric power producer, in one of the largest and most
complex bankruptcy cases in recent history.
The majority noteholder group in the chapter 11 case of The Wornick Company, a
leading manufacturer of ready-to-eat shelf stable food.
The official creditors committee in the chapter 11 case of Amtrol Inc., one of the
largest manufacturers of water system solutions in the world.
The unofficial committee of unsecured claimholders of Delta Air Lines Inc. in
Delta’s Chapter 11 cases. The unofficial committee was comprised of 18
members who held approximately $2.35 billion of unsecured claims against
The official creditors’ committee in the chapter 11 case of Armstrong World
Industries, Inc., one of the world’s largest manufacturers of building materials
burdened by multi-billion dollar asbestos liability.
The official creditors’ committee in the chapter 11 case of NorthWestern
Corporation, a major regional provider of electricity, gas and related services.
The unofficial committee of American Cellular noteholders in an out-of-court
restructuring that resulted in a recovery for the Noteholders of approximately
$0.82 per dollar for notes that were trading at $0.14 at the beginning of the
The creditors’ committees of several Sprint PCS "affiliates" involving the
restructuring of over $2 billion of debt.
Other significant representations include:
Citigroup and its subsidiaries in the Enron bankruptcy case and in numerous
Bondholders holding more than $3.5 billion in debt of Equity Office Properties Trust
in opposing the tender offer proposed in connection with its sale to Blackstone
Time Warner in its $17.6 billion acquisition, together with Comcast, of the assets of
Foamex International Inc., the largest manufacturer of flexible polyurethane and
advanced foam products in North America, in its emergence from chapter 11
under a plan of reorganization under which all creditors were paid in full and all
stockholders retained their interests.
The California Public Utilities Commission (CPUC) in the chapter 11 case of Pacific
Gas & Electric (PG&E), California’s largest investor-owned public utility and the
largest public utility in U.S. history to file for bankruptcy.
The Penn Traffic Company, one of the leading U.S. food retailers with annual
revenues of $2.3 billion, in its chapter 11 case.
We also have represented many significant stakeholders, including Marubeni
Corporation, Viacom and MatlinPatterson Global Advisors LLC, in significant cases
such as National Steel, U.S. Airways and NRG Energy. We are counsel to Pneumo-Abex regarding complex claims arising in the Federal Mogul bankruptcy. In addition, we
represented principal parties in the chapter 11 cases of Global Crossing and
Clients also rely on Paul, Weiss to provide advice in connection with complex structured
financings and investments. These clients include Major League Baseball, Silver Point
Finance, Lehman Brothers and others. We regularly advise financial institutions,
investment banks, investors and funds, including Citigroup, Morgan Stanley, Lehman
Brothers, Oaktree, Oak Hill, Angelo Gordon, Silver Point Capital and Värde Partners
on existing or planned investments.
The Bankruptcy Department is chaired by Alan W. Kornberg, who was named one of
the 2003 Dealmakers of the Year by American Lawyer magazine for his work on the
PG&E bankruptcy, and includes seven partners, three counsel and 14 associates who
concentrate exclusively on bankruptcy and restructuring matters. The Department
works closely with lawyers in the firm’s Corporate, Tax, Litigation, Real Estate, ERISA
and Environmental Departments depending on the nature of the matter and the
client’s needs. Many of these lawyers have recognized expertise in issues involving
* * *
Milbank, Tweed, Hadley & McCloy LLP
Milbank, Tweed, Hadley & McCloy LLP (commonly known as Milbank) is a United
States law firm headquartered in New York City. It also has offices in Washington, D.C.,
Los Angeles, London, Frankfurt, Munich, Tokyo, Hong Kong, Singapore and Beijing.
Milbank is a global law firm, with approximately 550 lawyers who provide a full range of
financial and business legal services to many of the world's leading financial, industrial
and commercial enterprises, as well as governments, institutions and individuals.
Milbank's roots are traced back to 1866, with the inception of the original firm,
Anderson, Adams & Young. The first merger took place in April 1929, when the then-successor firm, Murray & Aldrich, combined with Webb, Patterson & Hadley and
became Murray, Aldrich & Webb. In 1931, the Firm merged with Masten & Nichols to
become Milbank, Tweed, Hope & Webb. The Firm's present name dates from 1962.
Historically, Milbank has represented some of the biggest names in business and
finance. For decades, the firm's biggest clients were the Rockefeller family and the
Chase Manhattan Bank. The firm also advised the Vanderbilt family, members of the
Mellon and Johnson families, and Jacqueline Onassis.
The firm was responsible for all the legal work on the building of Rockefeller Center,
and its offices can still be found in the One Chase Manhattan Plaza. Additionally, the
firm helped create legal strategies for the developing railroads of the early 1900's, and
helped clients resolve the disputes arising over commodities shortages and bank loans
in the wake of World War I....
As commercial and investment banks progressively drove the financing of American
business, Milbank created hedge funds and other investment vehicles for financial
clients in the 1960s, 1970s and 1980s and capitalized on the growth of international
business, finance, and technology transactions in the 1990s....
In 1997, Milbank was forced to disgorge $1.9 million in fees in a Wisconsin bankruptcy
due to the failure to disclose a conflict of interest. One partner, John Gellene, was
sentenced to 15 months in prison for the crime. The incident became the subject of the
book Eat What you Kill: The Fall of a Wall Street Lawyer....
* * *
John (Jack) Wm Butler, Jr.
Jack Butler is co-leader of Skadden’s worldwide corporate restructuring practice, which
serves corporations and their principal creditors and investors by providing value-added
legal solutions in troubled company M&A, financing and restructuring situations. He has
acted as lead counsel for sellers, purchasers and creditors in hundreds of transactions
across the Americas as well as cross-border transactions in Asia, Australia, Europe and
the Middle East. Mr. Butler also advises officers and directors of public companies
involved in debt restructuring on matters related to corporate governance and fiduciary
Mr. Butler’s representative company matters include the restructuring of Delphi
Corporation, Friedman’s Inc., Haynes International, Inc., Kmart Corporation, Per-Se
Technologies, Inc. (formerly Medaphis Corporation), Rite Aid Corporation, Singer N.V.,
Venator Group, Inc., Wickes Furniture Co., Inc. and Xerox Corporation, and special
counsel representations of 360/networks, inc., Enron Corporation and The Warnaco
Group, Inc. He also represented US Airways Group, Inc. in its 2002 restructuring,
which provided the company with $1.24 billion in liquidity. Mr. Butler has substantial
experience in representing companies in transactions that provided for the disposition
of their assets and operating businesses to third parties as part of Chapter 11 cases,
including: Air Transport International LLC, Comdisco, Inc., Eagle Food Centers, Inc.,
FPA Medical Management, Inc., Peter J. Schmitt Co., Inc., Service Merchandise
Company, Inc. and USN Communications, Inc....
Representative creditor matters include advice to Bankers Trust Company, as agent
for the senior lenders in the reorganization cases of Bradlees, Inc. and The Grand
Union Company; Credit Suisse First Boston, in connection with the restructuring and
sale of Long John Silver’s restaurants; and Verizon Capital Corporation and its special
purpose affiliates in the reorganization cases of PG&E National Energy Group, Inc.
and USGen New England, Inc....
The issue: Is an employer liable if
employees don’t understand changes in
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Pensions seek consultant disclosure
By Yamil Berard, Star-Telegram Staff Writer
Jack Silver was a teacher at an inner-city Chicago school hobnobbing with the
managers of multibillion-dollar funds.
In fact, investment managers were paying $50,000 to "meet people like me," said
Silver. "Now, that's a hell of a lot of money."
Why Silver? Because he was on the pension board for teachers in Chicago. Its
consultant put on the seminars, raking in the admission fee from managers who might
be seeking a piece of the fund's $10 billion investment pie.
That made Silver wonder: Did attending the seminars help managers win the
consultant's recommendation? And was the consultant doing other business with
managers It hyped to the pension board?
Those are questions that some public pension officials have begun asking since a
handful of pension funds around the country have made discoveries that left them
They found that the consultant who guided their every move -- telling them how to divvy
up investment dollars which investment managers to hire and fire, and whether the fund
was getting socked with excessive trading charges'-- was making money from both
sides of the table.
Now there's a growing clamor for public pension plans to demand that consultants put
their cards on the table and disclose financial incentives. Some Texas plans have taken
steps to require disclosure, the Star-Telegram found in a survey of more than a dozen
But others still have not, despite what some critics see as the potential for conflicts of
interest. Their concerns:
• Some consultants recommend investment managers that are a branch of their own
company. In California, a Santa Clara Valley pension board fired investment manager
Putnam in February after the indictment of two people for securities fraud. Putnam and
the plan's consultant, Mercer Investment Consulting, are both part of Marsh &
McLennan Cos. The New York attorney general's office is examining whether
Marsh rigged insurance bids, and whether Mercer steered clients to Marsh
• Some consultants make money from brokers. In Chattanooga, Tenn., a pension
consultant was accused in October of recommending investment managers who would
route trades his way. In Nashville, Tenn., consultant PaineWebber paid $10 million in
2002 to settle a dispute involving trades sent to its broker, among other Issues.
• Some consultants sell products and services to investment managers that they
recommend to pension funds.
Investment managers for the Employees' Retirement System of Hawaii paid
consultant Callan Associates up to $250 000 a pop for consulting on strategy,
marketing and sales, and for software and database information, an audit found.
• Some consultants are paid "finder's fees" by investment managers for client referrals.
Consultants say that they have safeguards to ensure that they put clients' interests first.
They also say that they abide by federal rules and train employees on ethical
standards. As for past problems, PaineWebber said it would not comment on an issue
that's been resolved.
Critics say that consultants lowball charges to pension plans just to get their foot in the
door. Then the consultants can get much more lucrative business from others.
Payments for high-volume stock trades and client referrals can easily dwarf the $70,000
to $250,000 a year that Texas public pension plans pay their consultants.
"The consultant bids as low a stated annual fee as necessary to land the pension
client," said Edward Siedle, a former SEC attorney. "Once selected as a gatekeeper to
the pension, the consultant can demand a 'toll' or 'kickback' from anyone seeking to
offer investment advisory services to the fund client."
So it should come as no surprise that consultants don't always alert pension plans to
investment costs and risks critics say.
"The reason why is that the consultant is part of the gravy train," said Don Trône, a
former pension consultant who is president of the Foundation for Fiduciary Studies.
With questions swirling, consultants have fallen under the microscope of various
authorities, including the Securities and Exchange Commission. It is conducting a
study into the practices of a number of consultants and any potential conflicts they may
have, an SEC spokesman said.
Ultimately, critics would like to see more federal regulation. At the least, the SEC should
require consultants to list the investment managers buying their services and the
amounts they are paying, Trone said.
IcntZ«y' "a pension fund can l00k at that list and 90, 'Son of a gun, the very same
money managers that are paying $50,000 to $750,000 to the consultant are showing up
as finalists in our searches. I wonder if there's any connection?' " he said.
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11/8/2004 9:05 AM
To try to ensure untainted advice, some of the Texas public pension plans surveyed
by the Star-Telegram prohibit investment managers from paying consultants.
Others chose a consultant with no other business ties. Austin Employees' Retirement
System says it chose Summit Strategies Group for its independence.
The company's position: Being truly independent means not owning or being affiliated
in any manner with a broker; not accepting services or commission credits from
investment managers; not consulting for or selling services to investment managers;
and not managing money or executing trades.
"It means having only one business," said Eric Ralph, Summit's senior vice president.
The other Texas pension plans say they rely on their consultant to alert them to
potential conflicts, even when the consultant's contract doesn't require that. "The
consultant discloses voluntarily," the Dallas Employees' Retirement Fund said of its
consultant, Wilshlre Associates.
But some of those pension funds use consultants under fire in other states for potential
conflicts. Among those consultants are Wilshire, whose clients also include the Dallas
Police and Fire Retirement System and the Texas County & District Retirement System,
and Callan, consultant to the Employees Retirement System of Texas.
Like several of the nation's other blue-chip consultants, both have other, related
businesses. Among these, each puts on investment conferences and sells services to
Wilshire has operated a brokerage but announced that it will be sold by year's end, said
spokeswoman Kim Shepherd.
Callan sold its brokerage in 1998. But Callan still uses that broker if a client chooses to
pay Callan with soft-dollar commissions, SEC reports show.
Consulting companies typically rely on fire walls to separate the various ventures.
Wilshire says it doesn't allow pension consultants to have access to Information about
which managers use their other businesses or how much they pay.
Callan says it keeps its investment management consulting business separate from its
business that consults for pensions.
The companies also say they rely on disclosures to prevent conflicts. For example,
Callan says it tells pension plan customers which investment managers are also Its
clients. Those disclosures allow the pension fund "to take that fact into account, if they
so choose, when making their final selection," Callan officials wrote in response to Star-Telegram questions.
Wilshire says it discloses its relationships with Investment managers.
Such steps haven't offered enough assurance for some pension plans. Such
disclosures may use language that is so diluted or obscure that pensions can't get the
true picture, Trone said.
After the SEC began examining Wilshire's trading of mutual funds a year ago, several
pension plans put the company under new scrutiny.
The nation's largest public pension fund, California Public Employees' Retirement
System, demanded that Wilshire disclose its business arrangements by year's end. It
has also called on investment managers to disclose such deals.
Wilshire notes that the SEC has filed no actions against the company. "We maintain
that everything we did in our trading was legal," Shepherd said.
In San Diego, Diann Shiplone, a board member of the city pension fund, went public
with her concerns that Callan consistently picked underperforming or Inexperienced
Investment managers. Callan had ties to many of the firms she said.
Shipione, who works in the investment industry, has pressed the board to require
disclosures of any financial benefit a consultant may receive.
In Hawaii, a 2000 audit of the Employees' Retirement System, which may have lost
as much as $128 million as a result of one underperforming investment manager,
said that Callan's ties to the manager should be scrutinized.
That manager had paid Callan more than $200,000 for such things as consulting
services, software and database information, the audit found.
"While not technically representing a conflict of interest, the motivation to recommend
these particular investment managers warrants close scrutiny," auditor Marion Higa
The audit also reported that Callan had a financial relationship with most of the
investment managers it recommended to the board, and with all of those the board
retained for more than 15 years.
In response to Star-Telegram questions, a Callan spokeswoman wrote that the
company does not receive any payments from Investment managers in return for
sending them business. Employees are required to review and sign a code of
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11/8/2004 9:05 AM
ethics and can be fired for violating it.
"We hire honest and ethical people," the spokeswoman wrote. "This is non-negotiable
and, given our position in the industry, critical to our success."
For a long time, Silver was the lone voice on the Chicago teachers pension board
asking whether its consultant, Mercer, had done business with any investment
managers it was recommending.
He got the door slammed in his face.
"Client-confidentiality," he said he was told.
Now the Public School Teachers' Pension and Retirement Fund of Chicago
requires that investment managers disclose such financial relationships.
Some Texas plans are following suit. The Employees Retirement System of Texas,
the Houston Municipal Employees Pension System and the Texas County and District
Retirement System require consultants to disclose payments from investment
The El Paso Firemen and Policemen's Pension Fund requires investment managers to
report any business dealings with the consultant. The Fort Worth Employees'
Retirement System requires both sides to report.
Other Texas public pension plans aren't sure such disclosures are necessary or useful.
At the El Paso City Employees' Pension Fund, when consultant Mercer recommends
managers, it discloses any relationship they may have. The fund is also free to ask for
additional information, said administrator Robert Ash.
The board is also able to choose managers not on Mercer's list, Ash said, so long as
the board is focused on its objective: "They have to have best execution, best price."
Mercer officials wrote that it does not "request, require, or accept payment from
investment managers in order for them to be included or recommended in a manager or
mutual fund search."
"Furthermore, we do not accept soft-dollar payments; our clients are invoiced for all
fees and expenses."
Mercer declined further comment, citing the SEC review of the relationship between
consultants and investment managers.
This week, Mercer announced that it would discontinue its investment forums after one
in Tokyo In December. In a statement, Mercer attributed the decision to a change in the
Critics say that pension plans have no way of knowing whether they are getting the best
deal unless they examine their consultants' relationships.
That's a hard lesson for pension plans to learn when consultants are telling them that
everything is fine, Trone said.
"Everybody's having a great time," Trone said. "Why do we want to bring a nun
into the party now?"
Yamil Berard, (817) 390-7239 email@example.com
© 2004 Star-Telegram and wire service sources. All Rights Reserved.
February 15, 2009
Delphi retirees prepare to fight
request to cut health benefits
BY JEWEL GOPWANI
FREE PRESS BUSINESS WRITER
Delphi Corp. faces a flurry of objections to its request to end health care benefits for
about 15,000 salaried retirees.
Retirees across the country have expressed outrage to the plan in more than 35 letters
to U.S. Bankruptcy Judge Robert Drain, asking him to deny Delphi's motion for
permission to terminate those benefits by April 1.
Also, retirees in Indiana have hired legal counsel to fight Delphi's request.
Objections against Delphi's request must be filed by Tuesday. A hearing on the matter
is slated for Feb. 24.
In letters to Drain, retirees raised several concerns. Some worry that retirees wouldn't
be able to find affordable health insurance elsewhere if they have existing conditions
such as cancer and diabetes.
Others said they felt the company pressured them to retire before they turned 65, when
they would qualify for Medicare benefits, and they only retired because they were
promised interim health insurance benefits.
Erin Anheier, 52, of Gaines, southwest of Flint, said she hopes for a solution that would
avoid leaving salaried retirees without any benefits.
"At the very least, why not look at a greater cost sharing, where the retiree pays
something more toward health insurance," said Anheier, who said she worked for
Delphi and General Motors for nearly 31 years. "But to just completely cut it off,
particularly for this group of retirees, it sounds like a simple solution, but not an ethical
A Delphi spokesman said the company would respond in court.
Delphi said in court filings that eliminating health care benefits for current and future
salaried retirees would save the company more than $200 million through 2011. It also
would take more than $1.1 billion in liabilities off of Delphi's balance sheet, a move that
could help the supplier attract the financing it needs to leave bankruptcy protection.
Contact JEWEL GOPWANI at 313-223-4550 or firstname.lastname@example.org.
December 30, 2008
The Scam That Outscams
By Dan Solin, Huffington Post
The Bernie Madoff Ponzi scheme is generally regarded as the biggest financial scam
of all time. I don't agree.
Hedge funds, and particularly "fund of funds," make Bernie's despicable conduct look
like small potatoes.
The underlying premise of hedge funds -- outsized returns with no increase in risk--is
fatally flawed. Numerous studies have demonstrated the vast majority of these funds do
not beat the returns investors could obtain for themselves, by investing in a simple S&P
500 index fund.
It was only a matter of time before these funds started to implode. According to a web
site that tracks hedge fund failures, 108 funds at 66 firms have gone of business since
2006. Many more are sure to follow.
While the pitch of hedge funds is a scam standing alone, the "fund of funds"
embellished the con. These funds charged 1% or more for selecting and monitoring the
performance of "the best" managers.
This scam relied on the gullibility of investors who believe "best managers" is not an
oxymoron. The data clearly indicates that it is. If you own an actively managed fund, the
odds of it beating its benchmark over 1 year is 1 in 3, over 5 years it's 1 in 5, over ten
years it's 3 in 100 and over 25 years it's essentially zero!
How anyone can claim to be able to beat these odds and convince so many
sophisticated investors they should pay them to do so, is the poster child for a
combination of greed and cognitive dissonance.
Enter the track record of Bernie Madoff. Fifteen years with steady returns of 11%. This
was something fund of funds could really sell -- and they did.
Some funds reaped hundreds of millions of dollars of fees for simply forwarding
billions of dollars of assets to Madoff. These investors felt privileged to gain access
to him and were happy to pay the fund fee, secure in the knowledge that Madoff was
being closely monitored.
You know what happened next.
Here's the real scam: How motivated were these "fund of funds" to carefully monitor
Madoff's performance? Did they really want to kill the golden goose? Or is it likely they
either knew his returns were too good to be true or engaged in "willful blindness" to his
It would not have been difficult to detect his misconduct. He used an obscure
accounting firm. He had no independent custodian. These are major red flags.
Or, they could simply have read a 2001 story about Madoff written by Erin E. Arvedlund
The article was skeptical of Madoff's track record and noted "[T]hree option strategists
for major investment banks told Barron's they couldn't understand how Madoff churns
out such numbers using this strategy."
Of course, real monitoring would have included replicating Madoff's results. No one has
been able to do so....and with good reason.
The real beneficiaries of the scam are these funds. Their rewards dwarfed those
received by Madoff.
They are the ones who engaged in the scam that outscams "The Scam."
For more, GO TO >>> Songs of the Whistler; Confessions of a Whistleblower; CV05-00030 - David C. Farmer vs. Harmon - Witnesses: Eric Martinson & Bruce Nakaoka
November 11, 2008
Retirement fund loses
almost $1 billion
8.5 percent quarterly decline increases ERS' unfunded liability
BY GREG WILES, Honolulu Advertiser
The value of the Employees' Retirement System's portfolio fell almost $1 billion
during the recent financial market meltdown as stocks plummeted in July, August and
The ERS, a retirement fund for state and county employees in Hawai'i, yesterday was
told the value of its investments dropped $974 million to $9.87 billion in that quarter.
Over the past 12 months, the plan's assets plunged almost $1.8 billion.
The investment fund's stunning reversal was yet another example of a financial
meltdown that has hammered stock portfolios and the retirement savings of individuals.
The cratering of markets has produced losses for pension funds across the country,
with the biggest, the California Public Employees' Retirement System, losing more
than 20 percent in the same period.
The Hawai'i pension plan's results could pose long-term funding issues, but for now, the
ERS will have no problem covering about $800 million a year that it pays in pensions to
more than 35,000 retirees, survivors and beneficiaries. The plan also did better than
many of its public pension fund peers in losing less on a percentage basis during the
"A lot of plans have lost billions and billions in the value of their portfolio," said Neil
Rue, of Pension Consulting Alliance Inc. Rue, appearing before ERS trustees, said it
had been a challenging period for investment managers.
But "your portfolio has weathered the crisis better than your peers have."
The ERS' 8.5 percent decline during the quarter was less than the median 9.4 percent
drop of other funds.
The report left the ERS trustees hoping for a continued market recovery and improved
performance by its money managers.
The ERS doesn't invest the money itself. Instead, it entrusts it to investment managers
who put money in holdings ranging from individual stocks and bonds to real estate and
But like most pension and retirement accounts, it is heavily invested in stocks. A
Congressional Budget Office report last month said that nationwide, such accounts may
have lost $2 trillion since the beginning of the year.
The numbers are disquieting on a local and national level and may have implications
here for state and county budgets because of the way the ERS is funded.
Each year, public employers pay into the fund an amount that's less than what's
needed to cover the benefit payments. The rest is made up through the ERS placing
the money with investment managers with the goal of producing an 8 percent return
When there is a shortfall in either side of the equation, there is a chance that something
known as "unfunded liability" grows. That's the difference between the amount the
ERS has and the amount it is projected to owe in future pension payments.
At the end of the 2007 fiscal year, the plan had an unfunded liability of $5.11 billion out
of its total liability of more than $15 billion.
That meant the state had funded about 68 percent of its liability, one of the lowest
a look at the future
Yesterday, ERS Investment Committee trustees discussed what continued market
turmoil would mean, including whether the state and counties may have to increase
They discussed other issues related to the lower return, including having to switch
some of the portfolio to shorter-term investments that could be sold to help fund
pensions, or looking at more aggressive investments that are riskier but could produce
larger returns, they said.
They also were told at least one other government pension plan has broached the
subject of increasing contributions.
Last month, the California Public Employees' Retirement System said it might have to
seek a 2 percent to 4 percent increase in what state and county governments
More will be known next month when the ERS actuary presents the Hawai'i plan with its
annual report and discusses the plan's funding shortfalls.
October 8, 2008
Retirement accounts have
lost $2 trillion — so far
By JULIE HIRSCHFELD DAVIS, Associated Press
Americans' retirement plans have lost as much as $2 trillion in the past 15
months — about 20 percent of their value — Congress' top budget analyst estimated
Tuesday as lawmakers began investigating how turmoil in the financial industry is
whittling away workers' nest eggs.
The upheaval that has engulfed financial firms and sent the stock market plummeting is
also devastating people's savings, forcing families to hold off on major purchases and
even delay retirement, Peter Orszag, the head of the Congressional Budget Office,
told the House Education and Labor Committee.
As Congress investigates the causes and effects of the meltdown, the panel pressed
economists and other analysts on how the housing, credit and other financial troubles
have battered pensions and other retirement funds, which are among the most common
forms of savings in the United States.
"Unlike Wall Street executives, America's families don't have a golden parachute to fall
back on," said Rep. George Miller, D-Calif., the panel chairman. "It's clear that their
retirement security may be one of the greatest casualties of this financial crisis."
More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30
said they worry they will have to work longer because the value of their retirement
savings has declined.
Orszag indicated the fear is well-founded. Public and private pension funds and
employees' private retirement savings accounts — like 401(k)'s — lost about 10 percent
between the middle of 2007 and the middle of this year, and lost another 10 percent
just in the past three months, he estimated.
Private retirement plans may have suffered slightly more because those holdings are
more heavily skewed toward stocks, Orszag added.
"Some people will delay their retirement. In particular, those on the verge of retirement
may decide they can no longer afford to retire and will continue working," Orszag said.
A new AARP study found that because of the economic downturn, one in five workers
45 and older has stopped putting money into a 401(k), IRA or other retirement savings
account during the past year, and nearly one in four has increased the number of hours
he works. More than one-third of these workers have considered delaying retirement,
according to the study, which also found that more than half now find it difficult to pay
for basic items such as food, gas and medicine.
The hearing came just as workers are receiving — or about to receive — their quarterly
retirement savings account statements, which are likely to show disheartening drops in
the value of holdings.
Jerry Bramlett, the head of BenefitStreet Inc., a retirement savings plan administration
company, said there's a risk that people will overreact to the bad news by pulling their
money out of the accounts, which could add to their potential losses.
"For participants with many years of retirement, a drastic abandonment of equity
positions in their retirement account will only serve to lock in as-of-yet-unrealized
losses. Markets do go up and down, and 401(k) participants must try to think long-term," Bramlett said.
Still, he said workers should do their best to diversify their retirement savings accounts
and "perhaps consider less volatile investments."
On the heels of enacting a $700 billion market bailout, lawmakers are searching for
ways to help workers who are feeling the ripple effects of the financial crisis.
"What should we be doing to try to find a way to salvage the retirement position of
American workers?" said Rep. Dennis Kucinich, D-Ohio, an opponent of the
government rescue plan. Congress, he added, "rushed to protect Wall Street in hopes
that some benefits would trickle down to workers."
The massive losses have already reopened a bitter and long-running debate about
what role — if any — the government should play in helping workers save for
Some experts argue that the hefty tax subsidies that Congress has put in place in
recent decades for 401(k) and other worker-contribution accounts have made people's
retirement income less secure by shifting risks, decisions and costs from employers to
people who often know little about investing.
"They are fatally flawed," Teresa Ghilarducci, an economist at the New School for
Social Research, said of the tax-advantaged plans. "They're too risky, and it's not good
policy to have workers run their own retirement plan. They want government help."
Common mistakes workers make include overinvesting in a single stock — often their
company's — and participating in funds that carry large fees or involve excessive risk,
the witnesses said.
"You cannot tell the participants at the bottom of your fund prospectus, 'Warning: Your
psychology may lead you to make irrational choices,'" said Christian E. Weller of the
University of Massachusetts Boston.
The current market turmoil adds to an already difficult retirement savings picture for
Americans, who are increasingly shouldering the burden of managing and funding their
own company-sponsored retirement savings plans as firms eliminate traditional
Even before the recent downturn, older Americans were on track to continue working
longer. Twenty-nine percent of people in their late 60s were working in 2006, up from
18 percent in 1985, according to the Bureau of Labor Statistics. Over the next decade,
the number of workers who are 55 and older is expected to increase at more than five
times the rate of the overall work force, the BLS reported.
Falling home values and now the decimation of much of their savings could plunge
older Americans into period of austerity not seen in decades, Miller said: "The fear
factor is huge, and they don't see the availability of resources to them to get well."
Orszag said the situation has little precedent in American history.
"The period that we're experiencing is arguably the greatest collapse in confidence that
we've experienced since the Great Depression," he said.
See also: Dirty Gold in Goldman Sachs; Googling for AIG: The American Idol of Greed;
Googling for The Great Nest Egg Robberies; Vulture Nests Along Wall Street; Henry
Paulson’s Secret Treasury
August 13, 2008
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.
For more, GO TO > > > The Great Nest Egg Robberies - Part II; Citigroup: Vampires in
the City; Googling for The Great Nest Egg Robberies; Marsh & McLennan’s Mercer
Consulting; CV05-00030-Farmer vs. Harmon - Witnesses: Bernard Madoff, Yukio
Takemoto; Eric Martinson; Bruce Nakaoka; Linda Lingle; Ben Cayetano; David Farmer
< < < FLASHBACK < < <
March 21, 2004
CONCERNS RAISED OVER
CONSULTANTS TO PENSION FUNDS
By MARY WILLIAMS WALSH, THE NEW YORK TIMES
A small but growing part of the $2 trillion in state and local pension funds is being
steered into high-risk investments by pension consultants and others who often have
business dealings with the very money managers they recommend. After making such
investments, a few of these pension funds have come up short, forcing the
governments to draw on tax dollars.
The Securities and Exchange Commission is so concerned that it has begun an
inquiry into the practices of pension consultants, who serve as gatekeepers for
thousands of money managers.
The regulators will find not just financial consultants but a web of intermediaries --
marketing agents, lobbyists, brokers and world leaders -- between pension funds and
the investments they choose.
Some play surprising roles. Former President Bill Clinton meets with pension trustees
on behalf of the Yucaipa Companies, a private firm that seeks financial returns
through social investing. Ehud Barak, the former Israeli prime minister, persuaded the
Pennsylvania teachers' pension fund to commit $125 million to SCP Private Equity
Partners, a firm that invests in Israeli military technology. New York's former state
comptroller, H. Carl McCall, encouraged the Illinois teachers' pension fund to place $20
million in Healthpoint, a private firm that invests in orthopedic devices companies.
Some pension consultants play host to gatherings that showcase such famous people
to pension officials. Money managers may pay tens of thousands of dollars to
participate and often supply the marquee talent. Consultants, meanwhile, are being
paid by the pension funds to track and rate the money managers but may take money
from the managers for other services.
Under the consultants' watch, more money is flowing into private or alternative
investments, which are not publicly traded like stocks and bonds and whose
performance cannot be tracked in any agreed-upon way. Private investment pools
attracted virtually no state pension money a decade ago, but the typical state pension
fund now has nearly 5 percent of its assets in them, and some states have far more.
Though such unregulated investments offer the potential for high returns, they carry
more risk than conventional stocks and bonds. A few governments have lost money.
Richard Holbein, a pension consultant in Dallas, put the Arkansas teachers' pension
fund in touch with Andrew S. Fastow, then chief financial officer of Enron, who was
pitching investments in one of Enron's off-balance-sheet entities. Arkansas committed
$30 million and may have lost it all.
Another of Mr. Holbein's clients, the Louisiana teachers' pension fund, committed an
unusually large part of its portfolio to private equities and other alternative investments
at his recommendation. Because of recent losses, Louisiana and its taxpayers must
contribute $589 million to the pension fund -- $147 million more than last year.
Louisiana fund officials and Mr. Holbein say that private equity tends to be a volatile
investment with unexpected swings from year to year, but the overall approach remains
sound and does not present a long-term problem for the fund.
In other cases, pension money is landing in investments that deduct big fees. Some of
the costs may not be clearly disclosed, and some may be wholly unnecessary.
The Chicago teachers' pension fund was about to commit $35 million to a Boston
real estate partnership last December when one official noticed that nearly 2 percent of
the money would go to the consulting firm of Edward M. Kennedy Jr., the senator's
son, which the real estate developer had retained to market the investments. Normally,
pension funds are not billed for marketing fees. The teachers' fund refused to pay and
was permitted to invest anyway.
Specialists say the structure of public pension funds leaves them particularly
vulnerable. Fund boards are responsible for investing hundreds of millions of dollars,
but only the biggest ones can afford professional investment staffs. Public trustees are
often drawn from the ranks of firefighters, teachers and other public employees whose
retirements they are protecting. They often have little financial training and are expected
to serve as volunteers. Most public funds therefore rely heavily on consultants, even
though the consultants may have business ties with the very money managers they are
supposed to help select.
''In my opinion, there is a mismatch,'' said Brian N. Minturn, who was fired last year by
the Louisiana teachers' pension fund. He said he was dismissed after he raised
concerns that the prominent Dallas investment firm of Hicks, Muse Tate & Furst was
plying the trustees and their consultants with food and drink, and taking them on golf
excursions, hunting trips and other outings that he thought distracted them from their
fiduciary duty to vet investments prudently. An ethics panel ultimately found that
some pension officials, Mr. Holbein and Hicks, Muse had violated state ethics
''On the side of the pension fund, you may have food-service workers on $35,000 a
year, and they never get to do any of this kind of stuff,'' he said. ''And on the side of the
alternative investments, there is very high-powered talent, and very strong motivations,
to go out and get whatever you can.''
What the investment community wants, of course, is big blocks of money.
''If you look at where the money is, it's kind of what Willie Sutton said about why he
robbed banks,'' said Mr. Minturn, who once worked for Fidelity Investments and the
Invesco funds. ''Pension funds are just these huge piles of money.''
Consultants and many pension fund officials say that they are not being swayed by
business relationships, and that private equities are an important tool in their portfolios,
when used in moderation.
''Our board does believe in diversifying our portfolio into some active investments that
are riskier,'' said Brad Pacheco, a spokesman for the California state employees'
pension fund, known as CalPERS. ''They do it to add value to the fund.'' In some
cases, pension officials say they also choose alternative investments to achieve other
goals, like local development.
Mr. Minturn and some other concerned pension specialists said they had no objection
to private investment partnerships per se, but questioned the appropriateness of
investing public pension money in them. Because the assets are not publicly traded,
they cannot be sold quickly to raise cash; they have no listed price, and their
performance cannot be tracked or evaluated in conventional ways. They also involve
fees much larger than those for publicly traded stocks or simpler investments. They
sometimes generate large profits, but not always, and the partnerships are usually
structured so that the outside investors -- like pension funds -- bear most of the risk.
A few states and municipalities bar pension funds from investing in private equities.
Most states limit these investments to a small share of their portfolios. Data compiled by
Wilshire Associates, the investment advisory company, suggests that the average
state pension fund had 4.7 percent of its assets in private equities last year.
By Wilshire's count, the Louisiana teachers' pension fund had 18 percent of its portfolio
in such investments last year. But when its total commitment over time to various
private partnerships is calculated -- and the state cannot really back out of these
pledges -- Louisiana had at one point committed 42 percent of its assets to what it calls
''alternative investments,'' according to state pension plan documents.
Mr. Holbein said that Louisiana's investment problems were unforeseeable. Though
some individual private equity funds may falter, he said he believed that they could
produce higher returns than publicly traded stocks on the whole. He advocated a high
level of alternative investments for Louisiana, he said, because a state law requires the
teachers' pension fund to accumulate money quickly to reach full funding. More
conservative investments will not provide adequate gains, he said.
In December, the S.E.C. sent 12-page letters to about two dozen pension consultants,
requesting extensive information about what they do for pension funds, how they are
paid and how their pension work may conflict with their other business operations. The
agency appears to be trying to learn how often pension consultants work for both sides
of the table, receiving compensation from their pension clients and money managers.
Lori A. Richards, director of the commission's inspections unit, said the study was still
in progress and the commission had not drawn any conclusions.
Pension consultants sort money managers into asset classes and build databases
using their own criteria to help trustees compare and select managers. Some
consultants also sell their databases and tracking software to money managers and
even sell advice on how to achieve higher rankings.
A 2002 audit of Hawaii's pension fund found that its consultant, Callan Associates,
had recommended 16 money managers over time -- and 14 of them were paying
Callan for marketing advice and other services. ''The consultant's objectivity could
be suspect,'' said the state auditor, Marion M. Higa, calling for further scrutiny. She
noted that the Hawaii fund's overall five-year investment performance ''ranks in the
bottom 5 to 15 percent nationwide.''
A Callan spokeswoman said that Hawaii's trustees stood by Callan after the audit,
issuing a statement calling it ''a highly regarded investment advisory firm with an
unblemished reputation for integrity.'' In a statement, Callan said that it kept its
various business lines separate and that it told all money managers that they would not
win preferential treatment from Callan's pension consultants by buying other Callan
Early this year, Wilshire Associates took steps to make its pension consulting work
more independent of its other lines of business, and the leader of its consulting and
asset-management units left the firm. ''Wilshire has never participated in 'pay to play,' ''
a spokeswoman said.
Many consultants hold educational conferences for pension trustees. The trustees pay
a modest admission fee or none at all; the costs are borne by money managers, who
pay tens of thousands of dollars for the chance to attend and meet the trustees. The
more they pay, the more influence they tend to have over content and the more access
to trustees, from leading workshops to closer seating assignments.
CRA RogersCasey, a consulting firm, charges money managers $35,000 to $40,000 to
send two representatives to its gatherings, which take place at resorts and in the past
have featured speakers like retired Gen. H. Norman Schwarzkopf; Colin L. Powell,
now the secretary of state; and Mary Matalin, the Republican political strategist.
Mercer Investment Consulting, a large firm that is a unit of the Marsh & McLennan
Companies, charges money managers $35,000 to $58,000 a year to attend its
conferences. This month, Mercer sent a letter to its clients, telling them it had complied
fully with the S.E.C.'s request for information and outlining its other business activities,
like software sales and investment conferences.
''Making these products and services available to the broader investment community
does not in any way impact our objectivity,'' the letter said.
Bill Clinton addressed at least two public trustees' conferences last year and was well
received, said Jack Silver, a former trustee of the Chicago teachers' pension fund
who attended both. Mr. Silver has been an outspoken critic of the undisclosed business
relationships of pension intermediaries, but he said Mr. Clinton made useful remarks
about the economy -- not a sales pitch -- and that the trustees benefited from his
appearance. So, he added, did Mr. Clinton's sponsor, Yucaipa. ''It's marketing,'' Mr.
Silver said. ''When you have somebody like him, people remember.''
Yucaipa's managing partner, Ronald W. Burkle, is a billionaire and has been a
substantial donor to many politicians, including Mr. Clinton and several past and
present trustees of Calpers. In 2001, Calpers voted to commit $450 million to three
Yucaipa private investment funds, which are designed to generate returns and societal
benefits, by financing neglected businesses in poor neighborhoods and companies that
treat workers conscientiously. Calpers' most recent annual report showed that
these funds have drawn about $51 million in total investments and related fees,
and have so far not produced returns.
A Calpers spokesman said that private investment funds routinely draw on the partners'
capital in the first few years, and pay returns only later. He also said the commitment to
Yucaipa's funds is only a small part of Calpers's $164 billion portfolio. Yucaipa said its
fledgling investments were poised to bear fruit, but it could not provide additional
information last week.
Some pension officials say they find the out-of-office politicians useful liaisons. Jon
Bauman, the executive director of the Illinois teachers' pension fund, said his board
had been considering an investment in Healthpoint when Mr. McCall became vice
chairman. His arrival ''added to a favorable opinion,'' Mr. Bauman said.
See also: Aloha Airlines: Flying with the Bankruptcy Buzzards; CV05-00030 - David C.
Farmer, Trustee vs. Harmon - Witness: David Farmer
July 5, 2008
Employers use federal law
to deny benefits
By Mark Sherman, Associated Press Writer
Workers - and some judges - frustrated in legal fights
over benefits with large employers
WASHINGTON (AP) -- Dying of cancer, Thomas Amschwand did everything he was
told to make sure his wife would collect on the life insurance policy he had through his
"He was obsessed with dotting every `i' and crossing every `t'," Melissa Amschwand-Bellinger recalled about her husband, who died in 2001 at age 30.
But Spherion Corp., the temporary staffing company where Amschwand worked, told
Amschwand-Bellinger she would not receive any of the $426,000 in benefits she
believed she was due. When she went to court, Spherion succeeded in getting her
lawsuit thrown out. The Supreme Court on June 27 refused to review the case.
Amschwand-Bellinger received a refund of the few thousand dollars in insurance
premiums she and her husband dutifully had paid. The total, she said, would not cover
the costs of his funeral.
The story has played out often under the federal Employee Retirement Income
Security Act. Designed to protect employee benefits, the law has been used by
employers as a shield against suits.
Federal appeals courts, interpreting Supreme Court decisions dating to 1993,
consistently have said companies that offer health, life and retirement benefits under
ERISA cannot be sued for large amounts of money, or damages. Instead, they can be
sued only for typically smaller sums such as Amschwand's insurance premiums.
Several federal judges have bemoaned the unfairness even as they have felt
constrained to rule in favor of employers.
"The facts ... scream out for a remedy beyond the simple return of premiums," Judge
Fortunato Benavides of the New Orleans-based 5th U.S. Circuit Court of Appeals said
in the Amschwand case. "Regrettably, under existing law it is not available."
The Bush administration has argued that the appeals courts are misreading the
precedents and has asked the high court at least twice to clarify the earlier rulings. So
far it has refused.
Congress, which could amend ERISA to make clear such suits are allowed, also has
taken no action.
The result, in the view of ERISA experts, the administration and some lawmakers, is
"The beneficiary under the policy didn't get the promised benefit," said Colleen Medill,
an expert on ERISA at the University of Nebraska-Lincoln. "To say we're just going to
return your premiums, that's a total farce. That's not what they paid the premiums for.
They paid them for the benefits."
Sen. Patrick Leahy, chairman of the Senate Judiciary Committee, said at a recent
hearing that before ERISA became law, employees clearly could sue for benefits in
The court rulings, said Leahy, D-Vt., have left people "more vulnerable than they were
before the law was passed."
Spherion's decision to deny benefits to Amschwand-Bellinger turned on an odd set of
facts. Spherion, which employs about 300,000 people, switched insurers after Thomas
Amschwand was diagnosed with a rare form of heart cancer. The new policy did not
take effect until an employee worked one full day. Spherion never informed
Amschwand of the requirement.
Amschwand asked repeatedly whether there was anything else he needed to do and
was told no. He asked that the new policy be sent to him. Spherion never did so.
He died without returning to work. His widow said he easily could have worked a day if
that was what it took to activate the new policy. Spherion could have waived the one-day-of-work provision, as it did for other employees but not for Amschwand.
Spherion spokesman Kip Havel issued a brief statement when contacted by The
Associated Press after the high court declined to review the case. "We are pleased the
court has made its decision and the matter has finally been resolved," Havel said.
The court also recently turned down an appeal from Louis Gerard "Gerry" Goeres, who
sued Charles M. Schwab & Co. over hundreds of thousands of dollars in retirement
For 16 months, Schwab mistakenly refused to acknowledge Goeres as the beneficiary
in the retirement plan of his domestic partner, Stephen Ward, a Schwab employee who
died in 1999. By the time Schwab acknowledged its error, the value of the account had
declined by more than $500,000. Goeres sued for the rest. Federal courts dismissed
the suit. "Unfortunately, legal relief is not available," U.S. District Judge Charles Breyer
said in ruling against Goeres.
"You know the Schwab commercial, `Talk to Chuck?'" Goeres said. "I thought if Chuck
knew this, he'd say, 'Oh my God, this is so wrong.' I live on naive dreams."
Schwab said in court papers that Goeres could have taken legal action soon after
Ward's death, when he first was told he was not the beneficiary.
Amschwand-Bellinger said the cases show the need for either the court or Congress to
provide "some sort of meaningful remedy for employees when employers have a
breach of fiduciary duty."
A Texas native who lives in an unincorporated Houston suburb, she has since
remarried and has an 18-month-old daughter. She is president and executive director of
the Amschwand Sarcoma Cancer Foundation, which she founded with her first
She recognizes that she is more fortunate than many others who have fought similarly
futile battles for benefits under ERISA. "What if we had had children and I was a stay at
home mom?" said Amschwand-Bellinger, who previously worked for a public hospital
system. "What if I was 60 years old, with no skill sets, and I had to go back to work?"
June 28, 2008
Your retirement fund may be to
blame for gas prices
By Matthew Perrone, Associated Press
WASHINGTON — All those speculators getting the blame for driving up the price of oil
these days — just who are they? For part of the answer, look in the mirror.
The retirement savings of workers across the country, entrusted to pension fund
managers, are being plowed into one of the few investments that has delivered
phenomenal returns in recent years.
For decades, futures contracts were mostly traded by commodity producers and the
people who use the actual products, such as crude oil, corn and soybeans. Agreeing to
a price today for a commodity to be delivered in, say, two months is a way to smooth
out price fluctuations for those supplies.
But large investors faced with inflation have increasingly used them as protection
against the falling dollar. That includes pension funds, along with investment banks,
mutual funds and private hedge funds.
Research firm Ennis Knupp and Associates says $139 billion had been funneled into
energy commodities, primarily crude oil, by the end of March — and it estimates that
more than half of that is from retirement money.
The investments have paid off. The Standard & Poor's GSCI index, which tracks a
basket of commodities, is up 19 percent in the past five years, compared with just 9
percent for the S&P 500 stock index.
The risk is that if the remarkable run in oil and other futures markets reverses course,
billions of dollars of retirement benefits could be wiped out.
"A pension fund is supposed to be investing money in secure, stable investments
for the benefit of the people whose money they are investing," said Dan Lippe, an
energy analyst at Houston-based Petral Consulting Inc.
"When we hit that wall and things start falling," he said, "they will fall very fast, and the
pension funds that invested in commodities will see a tremendous loss of value."
The retirement system for public employees in California, the nation's largest, has $1.3
billion invested in commodities.
That's still just 0.5 percent of the fund's total $240 billion in assets, said Michael
Schlachter, who advises the fund. He said a collapse in oil or other commodity prices
would have little effect on retirees.
Still, a growing chorus of experts is convinced retirement investments are enough to
Billionaire George Soros, the airline industry and the International Monetary Fund are
all pressuring Congress to curb speculation by large investors, and action may come by
"Your pension fund manager may be using your retirement money to drive up the price
of oil," said Rep. Bart Stupak, D-Mich., at a hearing this week.
"What would happen if pension fund managers decided to increase their commodity
investment by another 20-fold?"
In 2002, when the stock market swooned after the dot-com crash and 9/11, retirement
assets dropped $7 billion, losing 8 percent of their value.
Speculators put money into commodity markets simply to make money on investments
— unlike commercial investors, who are actually buying or selling orders for physical
Energy analysts say it's unclear what effect speculators have had on oil prices, which
climbed briefly to a new record above $142 yesterday before easing.
But Stupak and other lawmakers already have more than a dozen proposals to rein in
commodity trading, including limiting how many contracts speculators can hold.
Schlachter, who is also managing director for investment consulting firm Wilshire
Associates, said pension funds should not be compared to Wall Street speculators,
who take huge risks every day to maximize returns.
"The pension plans we work with are using commodities only as a long-term hedge
against inflation," he said.
Unlike the stock market, where there are a limited number of shares of each company,
futures markets have no limits on contracts available. As long as a buyer can find a
seller for each contract, investment opportunities are virtually unlimited.
Critics say retirement funds that accumulate contracts are artificially driving up
In the case of oil, that means higher prices for gas, food and other goods.
"If they're going to be in the futures market, they need to trade rather than take this buy
and hold strategy," said Michael Masters, portfolio manager of hedge fund Masters
Capital Management. "That is the worst possible thing for the futures market."
November 25, 2007
Benefit change, bonds
may be in pension fix
Ky. panel studies funding shortfall
By Stephenie Steitzer, The Courier-Journal
FRANKFORT, Ky. -- The solution to Kentucky's public pension crisis could include
issuing bonds to cover previous funding shortfalls and reducing benefits for future hires.
Both will likely be among the recommendations of a special commission studying the
state's pension problem.
The final report is expected to be released Jan. 1, in time for the General Assembly
session, where shoring up an estimated $18 billion shortfall in the retirement systems
for 432,000 state employees, teachers and retirees likely will be a major priority.
If nothing is done to address the shortfall in the pension funds, they are expected to
be broke by 2022 -- a scenario that would leave the state unable to issue pension
checks to retirees and pay for their health care.
Commission members -- who represent government, employees and other related
fields -- told The Courier-Journal they largely agree that a necessary first step is
issuing bonds to replenish pension funds that for several years have received
less funding than experts recommended.
The amount of bonds could be as little as $500 million and as much as $1.5 billion,
said Personnel Cabinet Secretary Brian Crall, the commission chairman.
"We believe through bonding we can bring them up to full funding," said commission
member Brent McKim, who represents the Kentucky Education Association.
The idea is to borrow money at a lower interest rate than would be expected once the
money is invested by the retirement systems....
But Williams' plan includes a controversial proposal to eliminate traditional pension
plans for new hires and move toward a system that mirrors the 401(k) plans
widely used by private businesses....
"I hope most members now understand it's a dumb idea," said Bill Hanes, retired
executive director of Kentucky Retirement Systems and a commission member....
Two of the more controversial proposals include reducing the cost-of-living adjustment
and increasing the age or years of service before retirees qualify for full benefits.
Representatives of employee and retiree groups argue that because health care is the
culprit for the crisis, changing other benefits is not necessary.
And, they say, it takes away appealing incentives for people to work for government,
where salaries are generally lower than in the private sector.
"Throughout the hearings we've heard consistently it's not a pension problem, it's a
health-care problem," said commission member Lee Jackson, who represents the
Kentucky Association of State Employees. "So what are you going to do on the health-care side?"
But those in favor of reducing benefits for future hires say that making employees work
longer will address health-care costs because the state pays a portion of insurance
premiums from the time workers retire until they are eligible for Medicare....
Crall said other states have required more years of service to reduce costs.
"Get employees to work longer so they don't draw on the health insurance earlier," he
June 11, 2007
Public pension funds take
a risky gamble
Looking for the spectacular return, many are investing in heavily
hyped, oh-so-dangerous portions of the debt market.
Ultimately, that market is going to melt down.
By Bill Fleckenstein, MSN Money Central
I'd like to continue my focus on the debt market -- because, without the
incomprehensible complacency in all of its sectors, we would not be seeing the lunacy
now on display in the equity market. I've already discussed how the world's central
banks, by printing their own money to suppress their own currencies, have wound up
owning trillions of dollars' worth of U.S. Treasurys.
The nightmare in retirement dreams
Now I'll turn my attention to those who have been gullible enough to buy the sliced-and-diced mortgages that found their way into collateralized debt obligations (CDOs) and
other exotica. A synopsis of what's happening in that arena was recently penned by
Bloomberg writer David Evans in a story titled "Banks Sell 'Toxic Waste' CDOs to
Calpers, Texas Teachers Fund."
It begins: "Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the
riskiest portions of collateralized debt obligations to public pension funds."
Evans explains: "Worldwide sales of CDOs -- which are packages of securities backed
by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion
last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO,
the ones most vulnerable to losses from bad debt, the equity tranches. They also refer
to them as toxic waste because as more borrowers default on loans, these investments
would be the first to take losses. The investments could be wiped out."
At a recent presentation to pension managers, a Bear Stearns shill described the
bottom rung of the CDO ladder as follows: "It has a very high cash yield to it. . . . I think
a lot of people are confused about what this product is and how it works.''
I'm sure that's the case, but not in the way the Bear Stearns marketer meant it.
At the presentation, she likened CDOs to financial institutions in terms of having strict
oversight: "The outside agencies that oversee these structures are the rating agencies,''
However, her comment drew the following from Gloria Aviotti, managing director of
global structured finance for rating service Fitch: "It's not accurate. We don't provide
any oversight.'' That view was echoed by Yuri Yoshizawa, group managing director of
structured finance at another rating service, Moody's Investors Service: "It's a common
misperception," he said. "All we're providing is a credit assessment and comments.''
Thus, the ratings agencies are trying to have it both ways: They want to be paid to rate
these structures so people will feel good about them. But they're also trying to say: If
they blow up, don't blame us, as we're really not doing any work.
Bloomberg's Evans noted the motivation of the buyers: "Many pension funds, facing
growing numbers of retirees, are still reeling from investments that went sour after
technology stocks peaked in March 2000."
So, because the funds took too much risk or weren't competent, or both, they got
themselves into a hole. Now they're attempting to dig themselves out by reaching for
yield in the form of debt that's been ginned up and blessed by the ratings agencies. I
would not be surprised to find out that these pension funds are the biggest subscribers
to high-risk leveraged buyout (LBO) funds, as well.
Marketing serpents pitch to civil servants
Next, Evans quoted Chriss Street, treasurer of Orange County, Calif. (The county, for
those who don't know, went bankrupt by over-leveraging itself during the infamous 1994
version of the carry trade.) Said Street, regarding the appropriateness of public funds
investing in equity tranches, the diciest of all mortgage paper:
"It's grossly inappropriate to take this level of risk. Fund managers wanted the high
yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a
pig. . . . Very few pension plans could meet their fiduciary duty by buying portfolios of
subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing
when the defaults start to mount, as we know they will. The funds will take big losses."
Is your pension safe?
Many companies are freezing or dropping pensions. Here's what to do if it happens
Those losses will be enormous, and we'll see an incredible witch hunt when these
pension funds are left holding the bag, even though they brought it on themselves.
As I noted at the beginning, a variation of this theme is going on in the funding of all the
junk debt being created for the current LBO craze. However, knowledgeable people
have told me that we're starting to see some covenant tightening and higher coupons,
as deals already announced are being finalized via bond financing. At some point, even
though some of those deals have been announced, they actually won't be funded (a la
what happened in 1989 with United Airlines).
As to which deals meet that outcome, I don't know, but I have no doubt that LBO artists
will go too far. It doesn't take much imagination to see why once the music finally stops,
we will face a litany of problems like we've never seen before.
Ultimately, the debt market is going to gag. That will certainly end the equity party
(though other things could end it, as well), and this LBO mania will be over.
Money Central, MSN
< < < FLASHBACK < < <
July 1, 2006
Bear Stearns: Let’s Throw in the Ace (Greenberg)
The Bear Stearns Companies, Inc. is the parent company of Bear, Stearns & Co. Inc.,
one of the largest and best-known global investment banksand securities trading and
brokerage firms in the world. The company was founded in 1923 and serves
corporations, institutions, governments and individuals. The company's business
includes corporate finance, mergers and acquisitions, institutional equities and fixed
income sales, trading and research, private client services, derivatives, foreign
exchange and futures sales and trading, asset management and custody services.
Through Bear, Stearns Securities Corp., it offers global clearing services to broker
dealers, prime broker clients and other professional traders, including securities
The former CEO of Bear Stearns was Alan (“Ace”) Greenberg, currently chair of the
board, and is the cousin of Maurice Greenberg and part of the AIG group of course.
Bear Stearns was named one of the inside traders of 9/11. Their stocks were traded
60 times the usual amount as well.
Bear Stearns, of course, is where the Bush family, the Cheney family, George
Schultz, James Baker, etc. all do business. It is the leading brokerage firm of the
great and all powerful Bushonian Cabal.
Harken Energy, Texas Rangers and Clear Channel
by Al Martin
The $7 million that Bush Jr. put into the deal came from the Harken Energy stock
fraud. He and his father George Bush Sr. entered into a conspiracy with Bear
Stearns and others to artificially manipulate the price of Harken Energy stock, wherein
the Bush Family illicitly proceeded to trade their shares "against the box," through the
Pilgrim Investment Trust, the Bush Family-controlled Panama-registered
investment entity, wherein the price of Harken Energy stock was pumped up from
1-1/ 4 up to 7-3/8 and then dumped all the way back down again.
This whole round trip as it were was accomplished in only about 4 months time. By
being long at the bottom through the Pilgrim Investment Trust with shares that they
had borrowed from Bear Stearns -- by the way. They didn't even put up their own damn
shares. It's one thing to commit a scam, but the Bushes added a new twist. They
commit scams with Other People's Money. They take it one step further by using
OPM to commit the scams. Thus they generate the money for nothing.
So then Bush Jr. takes the $7 million out of the Harken Energy Stock Swindle that
he and his father orchestrated with their longtime ally Ace Greenberg, chairman of
Bear Stearns. He then invests in a syndicate to buy the Texas Rangers sports
franchise. Then Bush becomes part of the general management of the team and
proceeds to run the team into the ground, financially speaking. Then he is allowed to
sell his interest back to the syndicate, including his shares in Mays Hicks for 4 times
what he paid for them. Despite the fact the franchise was worth only half of the
purchase price since he had "managed" it. In order to bail the whole deal out, he as
governor of Texas then authorizes the expenditure of $345 million of public monies
in order to build the new stadium and surrounding complex for the Texas Rangers....
The syndicate was composed of the Hicks Muse crowd essentially. James Baker was
an investor in it and so was Dick Cheney. Then how this ties in to Clear Channel
Communications is that Hicks was the regent of the University of Texas, which is
another whole scam. This is a scam within a scam. The regents of the University of
Texas is an infamous scam....
Everybody promoted Clear Channel stock then, not only Bear Stearns, but Merrill
Lynch and JP Morgan, and they ran it up. They got everybody to promote the stocks.
so it got as wide as possible distribution. All these stocks were coming out of Clear
Channel, and there was an enormous amount of money coming in with virtually no
accountability as to how they have to spend that money. Then they can start paying 2
or 3 times what radio stations are worth just to own them. It was simply for the
ownership of the market. It doesn't have anything to do with making any money. And
yet the stock, which is now in the 40s, still trades in what is over a 35 P/E I think. It is
still considered a high P/E stock....
~ ~ ~
September 27, 2003
Bear Stearns Officer Will Get $117 Million
in Deferred Pay
The New York Times
The chairman of the Bear Stearns Companies, James E. Cayne, is receiving $117
million in company stock as deferred compensation, with most of the distribution
earned from a single bonus that has compounded in value for a decade, according to
Bear Stearns will also distribute shares worth a total of $210 million to three other
executives -- Alan C. Greenberg, the chairman of the executive committee, and the
firm's co-presidents, Warren J. Spector and Alan D. Schwartz, according to
Securities and Exchange Commission filings.
Since going public in the 1980's and 1990's, Bear Stearns and other investment banks
have required that executives take a large part of their annual bonuses in company
shares rather than cash....
The gains recorded by Mr. Cayne, 69, and his colleagues through the capital
accumulation plan, also underscore the value of deferred compensation that many
companies offer. In general, these plans permit executives to defer taxes on salary
and bonus income contributed to the plan until they withdraw the money, often at
Deferred compensation has gained more attention since the New York Stock
Exchange shocked investors with details of the $140 million pay package of Richard
A. Grasso, who was ousted amid a furor over the compensation.
As a publicly traded company, Bear Stearns regularly discloses pay arrangements for
executives to regulators and shareholders. Mr. Cayne, in addition to his duties at Bear
Stearns, is a board member at the New York Stock Exchange and served on the
committee that set Mr. Grasso's pay.
Shares of Bear Stearns have turned in the top performance of any securities firm since
the market peaked in March 2000. Since then, they have risen about 62 percent....
August 8, 2006
Public Pension Plans Face
Billions in Shortages
By Mary Williams Walsh, New York Times
In 2003, a whistle-blower forced San Diego to reveal that it had been shortchanging its
city workers’ pension fund for years, setting off a wave of lawsuits, investigations and
eventually criminal indictments.
The mayor ended up resigning under a cloud. With the city’s books a shambles, San
Diego remains barred from raising money by selling bonds. Cut off from a vital source
of cash, it has fallen behind on its maintenance of streets, storm drains and public
buildings. Potholes are proliferating and beaches are closed because of sewage spills.
Retirees are still being paid, but a portion of their benefits is in doubt because of
continuing legal challenges. And the city, which is scheduled to receive a report today
on the causes of its current predicament, still has to figure out how to close the $1.4
billion shortfall in its pension fund.
Maybe someone should be paying closer attention in New Jersey. And in Illinois. Not to
mention Colorado and several other states and local governments.
Across the nation, a number of states, counties and municipalities have engaged in
many of the same maneuvers with their pension funds that San Diego did, but without
the crippling scandal — at least not yet.
It is hard to know the extent of the problems, because there is no central regulator to
gather data on public plans. Nor is the accounting for government pension plans
uniform, so comparing one with another can be unreliable.
But by one estimate, state and local governments owe their current and future retirees
roughly $375 billion more than they have committed to their pension funds.
And that may well understate the gap: Barclays Global Investments has calculated that
if America’s state pension plans were required to use the same methods as
corporations, the total value of the benefits they have promised would grow 22 percent,
to $2.5 trillion. Only $1.7 trillion has been set aside to pay those benefits.
Not all of that shortfall, of course, is a result of actions like those that brought San Diego
to its knees. And few governments have been as reckless as San Diego officials in
granting pension increases at the same time as they were cutting back on contributions.
Still, officials in Trenton have been shortchanging New Jersey’s pension fund for years,
much as San Diego did. From 1998 to 2005, the state overrode its actuary’s instructions
to put a total of $652 million into the fund for state employees. Instead, it provided a
little less than $1 million. Funds for judges, teachers, police officers and other workers
got less, too.
To make up the missing money, New Jersey officials tried an approach similar to one
used in San Diego. They said they would capture the “excess” gains they expected the
pension funds’ investments to make and use them as contributions.
It was a doomed approach, leaving New Jersey to struggle with a total pension
shortfall that has ballooned to $18 billion. Its actuary has recommended a contribution
of $1.8 billion for the coming year, but the state has found only $1.1 billion, so it will fall
even farther behind.
Illinois also duplicated one of San Diego’s pension mistakes. It tried to make its
municipal pension plan cheaper by stretching its funding schedule over 40 years —
considerably longer than the 30 years that governmental accounting and actuarial
standards permit, and more than five times what companies will get under a pension bill
that has just passed Congress.
Illinois is stretching its pension contributions over 50 years. At that rate, many of its
retirees will have died by the time the state finishes tapping taxpayers for their benefits.
Colorado does not meet the 30-year funding guidelines, either. “At the current
contribution level, the liability associated with current benefits will never be fully paid,”
the state said in its most recent annual financial report.
Many officials dispute the suggestion that their pension plans are less than sound. The
director of the New Jersey Division of Pensions and Benefits, Frederick J. Beaver,
wrote recently that “our benefits systems are in excellent financial condition.”...
Still, the lack of a national response to what would seem to be a nationwide problem
underscores a peculiarity of the public pension world: like banks and insurance
companies, the pension plans are large and complex financial institutions, but they face
no comparable systems of checks and balances.
“There’s no oversight; there’s no requirements; there’s no enforcement,” said
Lance Weiss, an actuary with Deloitte Consulting in Chicago who advised Illinois on its
pension problems. “You’re kind of working off the good will of these public entities.”
Experts do not think that is good enough.
In January, the board that writes the accounting rules for governments announced that
it was looking for ways to tighten the rules for public pensions.
In July, Senators Charles E. Grassley and Max Baucus, the Republican chairman and
the ranking Democrat on the Finance Committee, asked the Government Accountability
Office to investigate the financial condition of the nation’s public pension plans.
In some states, lawmakers have been trying to stop some of the more egregious
pension practices that have come to light. Illinois, Louisiana and Nebraska passed laws
making it hard for employees to “spike” pensions higher by manipulating their salaries.
Because pensions are often based on a worker’s final salary, workers have found ways
to credit one-time bonuses to their last year and reap a lifelong reward. Arizona
required that early retirement programs be paid for up front.
And today in San Diego, a former chairman of the Securities and Exchange
Commission, Arthur Levitt Jr., is scheduled to issue a long-awaited report on the years
of pension lapses that got the city into its current predicament.
Mr. Levitt is not tipping his hand on his findings. But given the activist stance he took on
cleaning up the municipal securities markets as S.E.C. chairman, it would be no
surprise if he called for tighter control over a sector where the amounts of money are
huge and the amount of oversight is small.
The city of San Diego hired Mr. Levitt’s three-man audit team in February 2005, after
the city’s outside auditor, KPMG, would not sign off on its accounts.
He is working with the S.E.C.’s former chief accountant, Lynn E. Turner, and Troy
Dahlberg, a managing director in the forensic accounting and litigation consulting
practice of Kroll Inc., the investigative firm that is a unit of Marsh & McLennan
Public plans are not governed by the federal pension law, the Employee Retirement
Income Security Act, that companies must follow. They are not covered by the Pension
Benefit Guaranty Corporation, so if they come up short, they must turn to the taxpayers.
Instead, they are governed by boards that often include municipal labor leaders, whose
duty to represent their workers’ interests can easily conflict with their fiduciary duty to
represent the plan itself. And even the most exemplary pension boards can be
overruled, in many cases, by politicians whose priorities may be incompatible with
sound financial management.
“When the state runs into financial trouble, pension contributions are something that
they can defer without, quote-unquote, hurting anybody,” said David Driscoll, an actuary
with Buck Consultants who recently helped Vermont come up with a plan to revive its
pension fund for teachers. Politicians shortchanged it every year for more than a
“In fact, they are hurting people, and the people they are hurting are the taxpayers,
who, whether they realize it or not, are going into a form of debt,” Mr. Driscoll added.
“Those pension obligations don’t get cheaper over time. They get more expensive.’’
Eventually the cost gets too big to ignore, as it now has in New Jersey.
Corporate pension funds have plenty of problems of their own. But they are at least
required to adhere to a uniform accounting standard, which provides information that
investors can use to decide upon stocks to buy and sell. The standards, in turn, are
policed by the S.E.C.
Taxpayers have no such help. For municipal plans, the accounting standards are much
more flexible, a decision that was denounced, when it was issued in 1994, by the head
of the very board that wrote it.
James F. Antonio, chairman at that time of the Governmental Accounting Standards
Board, attached a detailed 10-page dissent to the new rule, saying that it “fails to meet
the test of fiscal responsibility” because it permitted “an extraordinary number of
accounting options” and some governments were bound to choose the weakest one.
Mr. Antonio has since retired.
Even though the governmental accounting board has now begun the slow process of
improving the standard, it is unlikely to come up with the level of detailed disclosure
required of corporations. And the board, with a full-time staff of just 15, has no authority
to enforce its rules.
San Diego violated the rules for a number of years, using accounting techniques that
hid both its failure to put enough money behind its pension promises and the debt to its
workers that was growing every year as a result.
Several times, the city asked the government accounting board to make a special
exception and approve its unorthodox pension calculations, but the board rebuffed it.
But the accounting board was forced to look on in silence as San Diego issued
reassuring financial statements, because its charter bars it from issuing public
pronouncements on individual cities.
San Diego might have gone on unchallenged indefinitely if not for the decision of one of
its pension trustees, Diann Shipione, to blow the whistle, eventually forcing the city to
correct the financial disclosures it had made in connection with an impending bond
sale. Only then was it possible to see in one place what had been going on with the
pension fund. And only then did the S.E.C. get involved.
The Depression-era laws that created the commission gave it no direct jurisdiction over
municipal securities; it can pursue municipal wrongdoing only when it finds fraud at
work. Lack of complete and accurate disclosure can constitute fraud, but the S.E.C. has
only infrequently shown interest in throwing its weight around in the area.
One of those rare instances happened when Mr. Levitt was chairman of the S.E.C., in
1994, after Orange County, Calif., abruptly declared bankruptcy and threatened to
repudiate its debts. Mr. Levitt became, as he said at the time, “obsessed” with cleaning
up the municipal securities markets.
He created an independent Office of Municipal Securities that reported directly to the
chairman; he championed rules to eliminate the pay-to-play practices then
commonplace in the municipal bond business; he forced better financial disclosure; and
he began an unheard-of number of enforcement actions.
Since Mr. Levitt’s departure from the S.E.C. in 2001, much of what he built has been
dismantled. The Office of Municipal Securities is down to a staff of two and is no longer
independent. The wave of enforcement actions against cities has slowed to a trickle.
The S.E.C. investigators who went to work in San Diego after the pension scandal
erupted have never said what they found.
When the S.E.C. shifted its gaze away from municipal finance, Mr. Levitt now says, it
left “a regulatory hole.” If the agency were equipped to monitor state and local
governments the way it monitors corporate disclosures, he said, “it could provide an
early warning of financial conditions threatening the solvency of any number of
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....
...Continued at Aloha Airlines
January 5, 2006
IBM to Curtail Pension Plan
IBM announced plans Thursday to reduce its pension burden by curtailing its defined-benefit pension plans and shifting its retirement focus entirely to an augmented 401(k)
The moves, effective in 2008, are expected to save the IT giant $2.5 billion to $3
billion over the next four years.
IBM plans to stop the accrual of benefits in its pension plans in 2008, and will redesign
its 401(k) plan to give pension participants a company contribution of up to 10% of pay.
Big Blue will double its current 401(k) dollar-for-dollar match to up to 6% of salary
contributions, with additional automatic contributions of 1% to 4%. Employees who don't
contribute directly to their plan also will receive an automatic 1% to 4% company
"We're taking these actions to better control retirement plan expenses, position the
company for business growth and competitive strength, and preserve employees'
earned retirement benefits, while instituting a leading-edge 401(k) plan that will be one
of the richest in the country and a standard in the United States," said Randy
MacDonald, IBM's senior vice president, human resources. "We also believe these are
prudent and balanced steps at a time of uncertainty and conflicting legislative and
regulatory directions about defined benefit retirement plans in the United States."
The changes don't affect IBM's roughly 125,000 retirees, former employees with vested
benefits or employees who retire before Jan. 1, 2008. Retirement benefits earned
before that date will be fully preserved. (Or until IBM files for bankruptcy, that is! - CB.)
IBM plans to record a pretax charge of $270 million for its recently ended fourth quarter
as a result of the new plan. The company expects retirement-related savings of $450
million to $500 million for 2006, but noted that it still expects its retirement plan costs
this year to rise $400 million to $500 million over 2005 levels.
According to IBM, its 401(k) plan is the largest in the country, with $26 billion in
assets. More than 90% of its U.S. employees participate in the plan. The company's
pension plan had about $48 billion in assets at the end of 2005.
December 6, 2005
DOE sues California firm over
lapse in pension fund
By Dan Martin, Honolulu Star-Bulletin
The Hawaii Department of Education is suing a California financial services company
over the disappearance of nearly $2.3 million of contributions by department
employees into their retirement funds.
The lawsuit, filed in California against Plan Compliance Group, accuses the company
of fraud, negligence and breach of contract.
It alleges that Walnut Creek, Calif.-based PCG, and in particularly company President
Francis W. Reimers, “took approximately $2,280,194.60 and converted the same to
their own use.”
PCG had been handling the transferal of employee contributions into tax-deferred
annuity funds for the department since 2002 until October. The funds are just one type
of investment option available to department employees, and not all employees are
The University of Hawaii, PCG’s other Hawaii client, has reported similar problems.
Officials there have estimated that $420,000 of university employee funds remain
It was unclear whether the university was considering similar legal action.
The office of state Attorney General Mark Bennett, which has been investigating PCG’s
conduct since the allegations came to light, refused comment on the matter. UH
officials did not return calls....
“We are deeply concerned at this apparent breach of trust and will work with the
attorney general to do everything possible to recover the missing money,” schools
Superintendent Pat Hamamoto said in a press release. She declined further comment.
Both university and education department officials say they have stepped in to make
the payments missed by PCG and that employees will suffer no losses.
When it first bid for the Education Department contract in 2001, PCG touted itself as a
nationally recognized leader in tax-sheltered annuity administration, the lawsuit said.
Yet department officials no believe that PCG was merely a “shell, instrument and
conduit through which Reimers conducted business,” often mingling PCG funds
with his own personal assets, the lawsuit stated.
See also: Hawaii Employees Retirement System
June 9, 2005
Committee on Health, Education, Labor & Pensions
“Protecting America’s Pension Plans from Fraud:
Will Your Savings Retire Before You Do?”
Opening Statement of Chairman Mike Enzi, R-Wyo
Good morning. I would like to thank all of you, especially my fellow members, for
attending today’s investigative hearing. I would also like to thank the Committee’s
Ranking Member, Senator Kennedy, for his support throughout this investigation.
Finally, and most importantly, I would like to thank the witnesses for being here today.
Your testimony will assist the Committee greatly in determining how best to address the
vital issues raised in this hearing.
Today, we will examine the largest pension fraud in U.S. history, involving the
investment firm of Capital Consultants, LLC. We will examine this case with several
considerations in mind:
· Whether the Department of Labor, and other relevant agencies, are prepared to
prevent future pension frauds and to ensure workers receive their promised benefits;
· Whether employers and workers receive sufficient education to recognize the signs of
· Whether the successful recovery of more than 70% of the funds lost to fraud in this
case can serve as a model for the federal government and the states in addressing
future pension frauds; and
· Whether there are legislative solutions that will aid in addressing pension fraud.
Through a complex Ponzi-like fraud scheme, Capital Consultants defrauded
approximately 300,000 pension plan participants and their families out of more than
$500 million. Today, the witnesses will describe how the loss of these funds impacted
lives, how the fraud was perpetrated, and how the federal government is prepared to
prevent future pension frauds.
Let me say upfront that this hearing is not an indictment of the Department of Labor, or
any other agency responsible for policing pension plans. In fact, the Department of
Labor can be very proud of its participation in uncovering this scheme. Moreover, the
complexity of the scheme highlights the difficulty in uncovering pension fraud schemes.
Yet, the size of the fraud highlights the importance of examining the lessons learned
from the Capital Consultants case. It is essential that the Committee determine the
extent to which the Department of Labor is prepared to prevent future pension frauds....
May 15, 2005
SEC Targets Pensions
By Neil Weinberg, Forbes
Now the U.S. Securities and Exchange Commission is taking on the pension
The expected action involves companies that advise public and private pension funds
how to allocate trillions of dollars in investments and which money managers they
recommend. This has led to accusations that “pay-to-play” is rampant among
consultants. Critics charge they favor money managers who buy services from
The consultants have denied such bias.
The SEC may have felt compelled to act in part because many pension fund managers
appear oblivious to the conflicts inherent in the advice they are receiving. Forbes last
year cited an official in charge of investments for the Santa Clara Valley Transit
Authority who had no idea his consultant, Mercer Investment Consulting, a unit of
Marsh & McLennan (nyse: MMC), was also receiving payments from many of the
managers it recommended....
Although the SEC is not expected to announce specific enforcement proceedings
against pension consultants on Monday, it is likely that such action will become public in
coming months, a person familiar with the situation said.
The SEC’s report is expected to recommend that pension funds use a checklist of
questions when evaluating consultants to ensure that the funds understand how their
advisers are compensated and the potential conflicts of interest inherent in their
businesses, these people said.
“It’s great that the SEC is finally alerting pensions to the dangers involved in
hiring these consultants,” said Edward Siedle, president of Benchmark Financial
Services, an Ocean Ridge, Fla., firm that investigates wrongdoing among money
“This goes to the heart of a system involving corrupt gatekeepers that is costing
many pension funds millions or billions of dollars.”
Among the firms the SEC reportedly requested to submit information in 2003 are
Mercer, Callan Associates, Segal Investment Solutions, Watson Wyatt and Wilshire
April 12, 2005
Groups to Consider Suing AIG for $400M
Leaders of the nation’s largest public retirement systems said Tuesday they will ask
their boards to approve suing troubled insurance giant American International Group,
Inc. to recover $400 million in losses suffered since the company’s problems surfaced
Treasurer Phil Angelides, a board member of the $182.9 billion California Public
Employees Retirement System and $125 billion California State Teachers
Retirement System, said “allegations of scandal and misconduct” at AIG have caused
“grievous damage” to holdings of more than 2 million California retirees and employees.
“The losses are beyond the realm of excessive,” said CalPERS President Rob Feckner,
who said he will ask the full CalPERS board on April 20 to begin legal action against
AIG, its executives and auditors. CalSTRS will consider the request in its May 4-5
California’s funds hold more than $1 billion worth of AIG stock - 20.9 million
California’s losses on AIG stock - $240 million at CalPERS and $160 million at
CalSTRS - come three years after the two funds lost $1 billion from the 2001 collapse
of energy giant Enron Corp. and telecommunications giant WorldCom Inc. in 2002.
“Four hundred million in losses means a direct hit to the taxpayers of California,” said
Angelides, a Democrat and announced candidate for governor next year.
“That’s money that’s not in our pension fund to meet retirement obligations of
teachers, police officers and firefighters.”...
For more, GO TO > > > AIG: The Un-American Insurance Group; Social Security: The
World’s Biggest Nest Egg
October 27, 2004
Questions on conflicts of interest
State pension official wants details
of execs' investments
By Alistair Barr, CBS MarketWatch
A North Carolina state pension official has asked executives of his fund's major
holdings if they have the same apparent conflicts of interest found at Marsh &
McLennan, the embattled insurance broker.
Marsh & McLennan officials have been found to invest in businesses that provide
services to their company, according to a letter distributed Wednesday by North
Carolina Treasurer Richard Moore.
The North Carolina state retirement system, with $60 billion in total holdings, owns $16
million of Marsh & McLennan shares.
Moore said that allowing executives to hold economic interests in customers or service
providers is "fraught with potential and real conflicts of interests and can result in
transactions that misappropriate value rightly belonging to shareholders."
Among the companies Moore contacted are Citigroup (C), Prudential Financial (PRU)
and Wells Fargo (WFC).
Marsh & McLennan (MMC) was sued by New York Attorney General Eliot Spitzer on
Oct. 14 for allegedly rigging bids and accepting payments for steering business to
Moore's objections referred to MMC Capital, the private-equity arm of Marsh &
McLennan that has raised more than $3 billion to invest in the insurance industry.
Jeffrey Greenberg, the deposed chief executive of Marsh & McLennan, and other top
company executives and board members have invested in MMC Capital, the New York
Times reported this week.
In recent years, MMC Capital has invested in at least 12 insurers, including Ace Ltd.
(ACE), a company run by Evan Greenberg, Jeffrey's brother; XL Capital Ltd. (XL); and
Axis Capital (AXS), the New York Times reported. Those companies could do business
with Marsh & McLennan, which would raise the appearance of a conflict of interest.
Charles Davis, chief executive of MMC Capital, is also a director on Marsh &
McLennan's board and sits on the board of Axis.
Jeffrey Greenberg used to be chief executive of MMC Capital from 1996 to 2002, the
Moore is not alone in his concern. The largest U.S. pension fund, the California Public
Employees' Retirement System, has voted against such directors as Warren Buffett for
having business holdings on both sides of a transaction.
Marsh & McLennan shares closed 18 cents lower at $28.69 Wednesday.
See also: California Public Employees’ Retirement System; Kamehameha Schools
Retirement Plan; Marsh & McLennan
For more, GO TO > > > Social Security: The World’s Largest Nest Egg
January 26, 2004
Retirement Plans: 96% of Employers Seeking Cuts
Pacific Business News
Most large employers are looking at ways to trim retirement plans, as more people
retire and more money has to be poured into existing plans, reports Mercer Human
In a survey of 242 employers, Mercer found that fully 96 percent were making or
considering making changes in their retirement plans to reduce costs.
“These changes include increasing or restructuring matching 401(k) contributions,
freezing accruals, closing plans to new entrants, and eliminating or reducing the level of
employer-paid retiree medical benefits,” Mercer said, referring mainly to “D.C. plans.”
That stands for “defined contributions.”...
Hawaiian Electric Industries last week reported that the biggest item holding back
growth in its profits was the need to make massive payments into its retirement funds.
United Airlines this month announced its intention to seek reductions in benefits for
people who have already retired, after thousands of flight attendants retired early last
year because United promised them in writing it would not do this.
Kaiser Aluminum, a corporation with the same corporate antecedents as Kaiser
Permanente and the original Hawaii Kai development here, collapsed so completely
into bankruptcy that its retirement plan has also collapsed, while US Airways, which
emerged from bankruptcy last year, won court permission to scrap a retirement plan....
For more, GO TO > > > Social Security: The World’s Biggest Nest Egg
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
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.
Employers also contributed to today’s underfunding by lobbying successfully to ease
funding rules a decade ago. Then as now, they fretted that their pension liabilities were
made high by a combination of low interest rates and a weak stock market. Congress
in 1994 softened funding requirements so company pension plans needed to be funded
at 90 percent of government-required levels, not 100 percent.
Viola! Many companies’ underfunded pension plans suddenly appeared better-funded,
and the companies were able to put less cash, or none, into their plans....
The Bush administration is proposing to extend a funding-relief provision, set to expire
this year, for two more years. This provision lets badly underfunded plans use a
In addition, companies seek extension of a provision that lets them withdraw pension
assets to pay for retirees’ medical benefits. And they want the right to contribute more
of their own stock when making pension contributions, in lieu of cash....
Besides other ways companies have tapped surplus pension assets, they’ve used
some assets to hire the consultants who taught them how to tap. For instance, Internal
Revenue Service filings show that International Business Machines Corp. used
$18.4 million of pension assets in 2001 to pay fees to Watson Wyatt, a consulting firm
that helped it convert to a cash-balance plan.
This was seven times the fee Watson Wyatt got when it began working for IBM in
See also: Lucent Technologies
For more, GO TO > > > Social Security: The World’s Biggest Nest Egg
Getting tough on
Despite budget constraints, the chief US pension law enforcer has stepped up the
pressure on pension-related crime.
But the critics say it still does not go far enough.
By Robert Stowe England
If numbers were any indicator, private pension and welfare plans would receive as
heavy protection as society could muster against civil and criminal fraud and pilferage.
Not only do their assets top $3 trillion, but the vast majority of US citizens – an
estimated 200 million in all – either actively participate in or receive benefits from them,
according to the General Accounting Office.
In 1974, ERISA established a group of federal investigators within the Department of
Labor who are charged with investigating cases of diverted, expropriated, and
misapplied pension assets, and with helping prosecutors to fine and/or jail wrongdoers.
Sadly, the resources federal authorities need to protect pension assets are lacking.
The chief enforcer for ERISA plans is the Department of Labor's Pension Benefit and
Welfare Administration. The PWBA has 382 investigators, whose job is to uncover
potential wrongdoing at 750,000 pension benefit plans and 4.5 million welfare and
Another 112 investigators at the Office of Labor Racketeering (OLR) focus on
organized crime, but they must cover the entire field of labor law - not just pension
Both the PWBA's head of enforcement, Charles Lewis, and the OLR's chief, Steve
Cossu, readily admit that they could use more investigators.
The crimes they must contend with run the gamut. Multiemployer plans in some
industries are prey to mob racketeering and embezzlement.
On the single-employer plan side, common offenses include overcharging plan
administrators for investment and legal advice, actuarial and accounting
services, and making imprudent investments.
Civil enforcement by the DoL relies heavily on voluntary compliance after investigators
uncover evidence of improper conduct or violations of prohibited transaction rules.
When voluntary compliance does not work, the DoL itself files cases charging civil
violations of ERISA. When it has information about criminal violations, it passes this on
to US attorneys, and sometimes to local district attorneys, for action. If it discovers that
a plan has been overcharged, for example, the DoL first determines if this was
inadvertent, or a systematic and deliberate abuse. If the latter, it may decide to pass
the matter on for criminal prosecution.
The skills it needs in civil cases are primarily those of an auditor; however, DoL civil
investigators monitor annual Form 5500 reports for signs of potential violations, and
when they find imbalanced portfolios or other suspicious circumstances, they conduct
an investigation that usually involves questioning the plan administrator and others.
Civil cases are easier to prosecute and win than criminal cases, since they require only
a preponderance of evidence to support a guilty finding.
The Federal Criminal Code specifies three principal pension felonies – theft or
embezzlement of funds; kickbacks, payoffs, and other conflict-of-interest
payments and receipts; and submitting false statements in required documents.
Criminal enforcement is a much more difficult proposition, requiring tougher, more
detailed investigations. These rely more on the skills of a detective and sometimes
require electronic surveillance or informants to put together the kind of evidence that
can prove guilt "beyond a reasonable doubt."
"Certainly we've got cases we can address, but we don't have enough investigators to
assign them to," says Roy Landra, Cossu's deputy. On the criminal side, DoL relies on
outside investigative help from other federal and local agencies in pension
investigations, including the Federal Bureau of Investigation, the Internal Revenue
Service, postal inspectors, US attorneys, and state attorneys general and local district
A lack of resources is only one issue.
The question of how those resources are allocated between civil and criminal cases is
equally important, and is the core of a long-running debate in Washington. DoL officials,
ERISA attorneys, and Congress disagree over what level of criminal enforcement is
needed to establish an effective deterrent against pension crime.
Federal authorities have strong criminal provisions at their service, nearly all of which
predate ERISA. In 1962, Congress amended the Welfare and Pension Plans
Disclosure Act of 1958, which authorizes federal investigators and prosecutors to
pursue labor racketeering cases that involve pension funds. The 1962 act expanded
this to include felonies against pension funds including embezzlement, false statements
and records, kickbacks and bribery. ERISA itself included an amendment to the
criminal code that allowed them to pursue these and other types of cases when they
involve ERISA funds.
The Racketeer-Influenced and Corruption Organizations statute of 1970 added to
the federal arsenal of legal weapons against organized crime, and against mob abuse
of pension funds.
Both a civil and criminal statute, RICO prompted creation of an interagency strike force
to fight organized crime, which includes the FBI, the Justice and Labor departments,
and the US Postal Service.
Federal enforcers' success at fighting criminal abuses is hard to gauge, however.
Pension fraud is rarely reported to regulators independently, so no statistics exist on the
incidence – as opposed to the actual prosecution.
DoL investigators dig up cases by diligently poring over Form 5500 annual reports and
performing random audits and other routine checks. But many pension-related crimes
never see the light of day, because no annual reporting form can plainly reveal such
crimes as racketeering, kickbacks and payoffs, while theft and embezzlement can be
concealed with false information supplied on Form 5500s. The most difficult cases are
often the most egregious, and are uncovered only after years of investigations, often
begun by tipoffs and informants and sometimes requiring undercover agents to
penetrate the world of organized crime.
Both civil and criminal enforcement of pension laws could become even more difficult if
budget cuts now under consideration go through. The budget recently approved by the
House would cut funding for both the OLR and the PWBA by 7.5% next year, according
to a Labor Department source, and an uncertain outcome looms in a titanic budget
battle between Congress and the president.
Landra at OLR expects that the number of investigators there, which has already
declined from 118 in early 1993 to 112 today, may decline even more. The PWBA is
determined to sustain the present level of field investigators in spite of projected cuts.
But no one expects to see the number of investigators increased at either the PWBA or
the OLR, despite widespread agreement that more are needed.
Emphasis on civil cases
In the first years after ERISA passed, the PWBA devoted 85% of its enforcement effort
to civil matters. This has prompted some figures in the pension arena, including
prominent ERISA lawyers and former regulators, to criticize the DoL's enforcement
efforts as inadequate, especially against organized crime.
A 1989 report on construction industry racketeering by the New York State Organized
Crime Task Force concluded with this harsh verdict: "Federal policing of pension and
welfare funds is too insubstantial to provide an effective deterrent to fraud and theft."
Ian Lanoff, who during the Carter Administration was in charge of what later came to
be known as the PWBA, put an overwhelming emphasis on civil prosecution. By
concentrating on the recovery of assets, says Lanoff, now a partner with Bredhoff &
Kaiser, a Washington, DC law firm, the department was "sending a message that if
someone violates ERISA, they'll have to pay the pension funds back out of their own
pockets." This, he believed, would act as a deterrent.
Lanoff notes that it is easier to win civil cases, where the burden of proof standard is
easier to meet. Criminal cases require greater sophistication and longer investigations
to produce enough evidence to convince a US attorney or local district attorney to take
the case. Lanoff considered prosecution of civil cases easier to assure as well, since
they are handled by the solicitor of labor. The decision on whether or not to pursue a
criminal case that DoL investigators developed is up to criminal prosecutors at the
Justice Department and other jurisdictions.
Besides, Lanoff says, "For every criminal put in jail, another is ready to step into
In the case of mob-dominated Taft-Hartley plans, for example, when one pliant union
official was ousted, mob families usually had no difficulty finding another to step in.
"The whole purpose of ERISA was that the criminal provisions had failed, and that civil
recoveries were needed to protect pensions," recalls a former official who worked in the
DoL at the time.
Frank Clisham, the criminal coordinator at PWBA, says the decision to pursue a
criminal case depends on the severity of the offense. Investigations usually start out as
civil cases, and the worst offenses, if uncovered, become criminal cases.
Such arguments have never wholly convinced the critics that civil justice is the best
remedy for the worst pension abuses, however. The most important penalty on the
criminal side is the jail term, since stolen funds are often difficult to recover.
Embezzlement of pension funds carries a maximum prison term of five years for each
count. Criminal fines for embezzlement, for example, which used to be no higher than
$10,000, have been subject to the stiffer federal sentencing guidelines since the late
Michael Gordon, a Washington, DC attorney, helped write ERISA and is a persistent
critic of what he calls the DoL's "spotty" efforts in criminal enforcement.
Gordon charges that enforcement is not targeting enough white collar crime committed
by plan administrators, accountants, broker-dealers, investment bankers,
attorneys, and consultants. This failure sends a signal that the department is not
worried about these matters, he says. This, in turn, encourages more criminal activity.
As for racketeering, the DoL was often criticized in congressional testimony during the
early years of ERISA as the weak link in the organized crime strike force.
Since enforcing labor and pension laws is critical to any effort to curb mob influence in
certain unions, the DoL's failure to be an aggressive player weakened the federal effort
to fight organized crime, critics claimed. Some critics even alleged that powerful unions
exerted political pressure on the DoL to slow down the strike force.
After 1978, criticism of DoL's criminal investigation efforts focused on the PWBA, which
some saw as failing to devote enough resources to criminal cases to maintain a
credible deterrent. The secretary of labor usually denied this. But when the DoL's
inspector general publicly criticized the department for failing to adequately pursue
criminal investigations in 1988 and 1989, then-Labor Secretary Elizabeth Dole
ordered a complete review of its criminal enforcement efforts.
This review led then-PWBA chief David Ball to seek and eventually gain congressional
approval to increase his office's number of pension investigators by one-third, from 266
to 357, between 1989 and 1992. Ball, now a senior partner and head of the
Washington, DC law office of Williams Mullen Christian & Dobbins, doubled the amount
of time the PWBA devoted to criminal investigations in response to the criticism. Today,
30% of the PWBA's enforcement efforts go into criminal investigations, says Charles
Lerner, the agency's investigations director.
But has this established an effective criminal deterrent? Compliments are muted.
"There is more of a deterrence today," says Cossu, stopping short of a wholehearted
endorsement. But while commending the PWBA for its civil enforcement, Cossu does
not believe that the agency has yet reached its potential in criminal matters, in spite of
some progress. The task is not an easy one, he admits: "You can't build a criminal
investigation capability overnight."
The PWBA's increased crime-fighting effort since 1989 has produced noticeable
improvements. Criminal indictments against plan administrators, service providers, and
labor racketeers have increased from a paltry 11 in 1990 to a more impressive 141 in
1994. And for fiscal 1995-October 1994 through last September-101 indictments have
been handed down. But convictions have been harder to come by, rising from a tiny
seven in 1990 to 34 in 1994, and 32 for fiscal year 1995. The PWBA's Clisham predicts
that the higher level of indictments of the last two years will soon be reflected in a
similarly higher level of convictions.
The OLR, meanwhile, has shifted its focus increasingly towards pension-related cases,
and today spends more than half of its resources on pension investigations, says OLR
chief Steve Cossu. Much of this investigation follows on the heels of traditional
bribery and kickback investigations to violate labor laws.
Creating a deterrent
If progress is to continue, some critics stress that the DoL's criminal investigations will
need clear and consistent support from the secretary of labor and the head of the
Ball, for one, worries that concern for criminal investigations is already flagging, and
that this will show up in a few years in fewer indictments. He faults Labor Secretary
Robert Reich and PWBA head Olena Berg for their highly visible campaign for
economically-targeted investments. This distracts the DoL from its principal pension
responsibility, he says-deterring the theft of private pension assets through the
investigation and prosecution of ERISA and related criminal violations.
"Enforcement is the primary responsibility," he says. "Nothing else really matters."...
Former PWBA chief David Walker, who served during the Reagan Administration,
believes that deterrence is the agency's underlying operating philosophy today – putting
enough people in jail to discourage anyone else from flouting the law.
"You don't need to send that many people to jail to send a message to the benefits
community as to the importance of complying with the law," says Walker, now a partner
at Arthur Andersen in Atlanta. And with its current level of indictments and convictions
for theft, kickbacks, bribery, and false statements, he believes the PWBA is succeeding
in establishing deterrence.
Gordon disagrees, and cites as evidence the DoL's failure to criminally investigate
anyone associated with the termination of Pacific Lumber Company's pension plan in
1986, which has been dragging through the courts since 1991.
Pacific Lumber was acquired in 1985 by Maxxam Group, the vehicle of Houston-based financier Charles Hurwitz, with the help of $450 million in junk bonds
underwritten by Drexel Burnham Lambert.
Executive Life Insurance Company bought $100 million of the bonds. After
Maxxam recovered $62 million of surpluses from Pacific Lumber's pension plans, it
replaced the benefits with annuities from Executive Life. This would violate ERISA's
prohibition against pension sponsors hiring service providers that are parties in interest
to a deal under negotiation.
It also raises the suspicion that Executive Life may have received a kickback for
buying the junk bonds that financed Maxxam's takeover.
The troubled insurer was taken over by California authorities in 1991. Benefits were
suspended for a time, and then resumed at 70% of their former level by the Aurora
Group, the successor to Executive Life. Pacific Lumber has agreed to pay the
The DoL prosecuted Pacific Lumber civilly for having carried out a prohibited
transaction. But it chose not to pursue a criminal indictment, says Lerner,
because the PWBA thought the case would not be as strong.
Lerner admits that "there's a basis" for a potential criminal investigation, presumably
based on Pacific Lumber's purchase of the Executive Life annuities.
Critics further note that the DoL's civil suit came only after Executive Life had been
taken over by California authorities, and that the DoL should have taken notice of
Pacific Lumber 's situation as soon as the pension surpluses were removed in 1986.
"Our concern was that when a pension plan terminates and it buys annuities, that the
annuities should be the safest annuities available," says Lerner. This would prevent
corporations from buying lower-priced and perhaps less safe annuities, "to get as much
of the reversion as possible," he notes.
The last Congress gave the DoL expanded authority to prevent future Pacific Lumber
incidents by passing the Pension Annuitants Protection Act, which requires plan
sponsors to buy the "safest" annuities.
The Pacific Lumber matter remains unsettled. Employees have alleged in their civil
class action lawsuit that the recovery of the surplus pension assets, and the selection of
Executive Life, were prohibited transactions under ERISA. Their suit was thrown out
in 1993 by a US District Court, but was reinstated earlier this year by the Ninth US
Circuit Court of Appeals in San Francisco, and sent back to the District Court for trial.
The DoL's civil ERISA case is joined with the class action case, and will now go forward
with the District Court trial.
Even if plan participants are made whole, "the question arises whether the purchase of
bonds by Executive Life was a quid pro quo for the selection of Executive Life for the
annuities," Gordon says. On the surface, he asserts, "this appears to be a conspiracy
to commit white collar fraud."
A quid pro quo arrangement would represent a violation of Section 18 of the criminal
code, which prohibits bribes and kickbacks to pension funds, Gordon argues.
Congress has been skeptical about the DoL's heavy reliance on civil prosecution almost
from the beginning. Hearings in the mid-1970s by the Senate Permanent
Subcommittee on Investigations, chaired by Sam Nunn (D-Georgia), regularly featured
testimony about the dangers of ignoring the mob's presence in multiemployer pension
Congress responded with special provisions of the Inspector General Act of 1978,
which reorganized a number of offices within the DoL to insure that investigations into
criminal and mob influence on single and multi-employer plans would remain
independent of any potential interference from the Secretary of Labor.
The act established an independent inspector general to investigate and audit activities
in most federal departments and agencies. The DoL's inspector general got an
additional responsibility, the OLR. This organizational approach was an attempt to keep
both the IG's Office of Investigations and the OLR free of political pressure to minimize
investigations into organized crime influence.
Still, the DoL continued to focus on civil, not criminal, cases. One DoL source attributes
the long delay to Washington's unwillingness at the time to take on a powerful political
constituency, organized labor – a charge officials deny. Then in 1982, after yet more
hearings, this time on waterfront corruption, and a DoL lawsuit, the first major union
pension fund was taken out of the hands of a powerful union – the International
Brotherhood of Teamsters.
Back in 1977, the Teamsters' Central States, Southeast and Southwest regional fund,
based in Chicago, was suspected of steering pension investments into Las Vegas
The DoL pressured Central States into appointing a special named fiduciary, the
Equitable Life Insurance Company, to run its pension plan. But no ERISA lawsuit
was brought at first.
Congressional hearings the same year again focused on organized crime's influence on
pension funds, and the DoL then filed an ERISA lawsuit. This eventually led to a 1982
consent decree requiring Central States to have a named fiduciary, now Morgan
Stanley, and a monitor, former US senator and attorney general William Saxbe.
Supporters of civil prosecution against organized crime had scored a victory. But
Congress was still not satisfied.
The President's Commission on Organized Crime identified four big unions as being
substantially under mob control – the Teamsters, the Laborer's International Union
of North America, the Hotel and Restaurant Employees International Union, and
the International Longshoremen's Union.
In 1984, Congress, unhappy with DoL's failure to increase investigations of pension
crime (outside the OLR) passed the Comprehensive Crime Control Act which
included an amendment to ERISA that "practically demanded the secretary of labor
increase the department's criminal enforcement activities," says former OLR chief
Raymond Maria, who now heads his own consulting firm in Alexandria, Virginia.
The new law made the DoL the lead player in investigating criminal activities against
pension funds, in response to complaints by department officials that the law was
unclear on this point.
Nunn held another series of hearings at the Senate Permanent Subcommittee on
Investigations in 1988, followed by a high-profile assault on the DoL's intransigence by
inspector general J. Brian Hyland. The result was a battle between the IG and Solicitor
of Labor over whether 100 general investigators in the IG's office (above and beyond
those at the separate OLR) could investigate pension matters. The IG said "yes" but the
Solicitor of Labor said "no."
The dispute was finally resolved when the Justice Department's Office of Legal
Counsel issued an opinion that narrowed the powers of all IG's throughout the
government. This removed the IG's 100 investigators from investigating pension funds
and violations of labor, workplace safety and health, except through the OLR.
Critics like Maria call the Justice Department ruling a blow to criminal
enforcement efforts designed to protect pensions.
It also meant that the 100 new agents that Ball brought on at the PWBA shortly
thereafter did not necessarily represent a net gain of 100 investigators looking into
pension matters. In fact, PWBA investigators generally lack the training in organized
crime's ways that special agents receive in the IG's office, including the OLR. They also
lack the authority to conduct electronic surveillance-vital in bringing a criminal
investigation of organized crime to a successful close, Maria says.
Even today, OLR investigators still tend to view PWBA investigators as sophisticated
auditors, not crime detectives. And finding evidence of a kickback and bribery sufficient
to win a criminal conviction requires different skills than are needed to ferret out
suspicious portfolio arrangements.
But the PWBA has become a valuable ally in cooperative criminal investigations with
the FBI and the criminal division of the IRS. In one of the most important pension
cases against organized crime in recent years, the agency played a key role in
prosecuting an extraordinarily corrupt local of the Laborers International Union of North
America, the Mason Tenders District Council of New York.
Steve Pine, deputy director of the PWBA's New York regional office, says his
investigators had begun to look into corruption at the Mason Tenders' $270 million
pension fund when the US attorney informed them that the FBI was investigating too.
The joint FBI and PWBA investigations, some going back to 1989, led to criminal
indictments in 1990 and a combined civil RICO and ERISA case in 1994, all prosecuted
by the US attorney for the Southern District of New York.
The criminal case led to more than a dozen convictions against mobsters, union
officials, and corrupt service providers who systematically plundered the pension
fund for decades through payoffs, bribes, money laundering, and embezzlement.
Genovese family capo James Messera and former Mason Tenders' president Frank
Lupo pled guilty to racketeering charges in connection with the real estate scheme and
other matters. Altogether, seven of the 26 indicted were sent to prison.
The civil RICO/ERISA suits were filed last fall, the US attorney alleging that more than
$50 million in Mason Tenders' pension and welfare funds had been looted and
wasted since 1987.
Along with the purchase of the headquarters building and several other real estate
scams, the suit alleged kickbacks and embezzlement.
The case was the first time the government sought relief under both RICO and ERISA
in the same lawsuit, the purpose being to seek return of some of the looted pension
assets. The tactic is likely to be used again in pension corruption cases, says the
PWBA's Clisham, since it offers a powerful one-two punch of fines and jail sentences
(RICO) and restitution of pension assets (ERISA), and therefore could provide an
effective deterrence. So far, $1.2 million has been forfeited by the convicted felons, he
The PWBA had already shown that it could play hardball in civil ERISA suits which were
aimed at taking pension funds out of the hands of corrupt union officials. But the
Mason Tenders case provided the first clear proof that the agency has learned to play
effectively as a criminal investigator as well. More successful criminal investigations
that lead to successful prosecutions like the Mason Tenders could go a long way
toward erasing doubts about the DoL's determination to fight pension crime as
vigorously as it can with the resources available.
But can the DoL keep it up? In spite of assurances by some at the department that it
will not reduce the PWBA's staff of investigators, the budget cuts Congress is
contemplating would seem to make a reduction inevitable.
"The budget will be down. There will be cutbacks. There's no doubt about that," says
Dave Certner, a pension lobbyist at the American Association of Retired Persons. In
that case, federal investigators will have to develop new strategies to maximize
available resources if the current levels of criminal indictments is to be sustained.
Copyright © 1998 Asset International, Inc. All rights reserved. Plan Sponsor November
October 22, 2002
More Pension Shortfalls
by Stephen Taub, CFO.com
At least three large, high-profile companies announced huge pension shortfalls on
Alcoa Inc. said it expects an increase in its pension liability of $700 million to $1
billion, mostly due to the decline in equity markets and interest rates, according to
"Assumption changes for major plans are expected to impact after-tax earnings by
approximately $50 million annually," the company management said, according to the
wire service. "There is no material change in funding expected in 2003."
Alcoa is reportedly lowering its expected rate of return on its pension assets from 9.5
percent, but did not provide a new figure.
Also on Monday, 3M Co. said it would take a $1 billion charge in the fourth quarter due
to a pension funding shortfall.
And United States Steel Corp. reported it may have to take a $750 million charge
against equity later this year to account for possible shortfalls in its union employee
Last week Credit Suisse First Boston said that 325 companies in the S&P 500 would
have pension shortfalls by the end of the year.
February 4, 2002
Crime in the Suites
By William Greider, The Nation
The collapse of Enron has swiftly morphed into a go-to-jail financial scandal, laden with
the heavy breathing of political fixers, but Enron makes visible a more profound
scandal--the failure of market orthodoxy itself. Enron, accompanied by a supporting
cast from banking, accounting and Washington politics, is a virtual piñata of corrupt
practices and betrayed obligations to investors, taxpayers and voters.
But these matters ought not to surprise anyone, because they have been familiar,
recurring outrages during the recent reign of high-flying Wall Street. This time, the
distinctive scale may make it harder to brush them aside.
"There are many more Enrons out there," a well-placed Washington lawyer confided.
He knows because he has represented a couple of them.
The rot in America's financial system is structural and systemic. It consists of lying,
cheating and stealing on a grand scale, but most offenses seem depersonalized
because the transactions are so complex and remote from ordinary human
In this era of deregulation and laissez-faire ideology, the essential premise has been
that market forces discipline and punish the errant players more effectively than
government does. To produce greater efficiency and innovation, government was told
to back off, and it largely has. "Transparency" became the exalted buzzword. The
market discipline would be exercised by investors acting on honest information supplied
by the banks and brokerages holding their money, "independent" corporate directors
and outside auditors, and regular disclosure reports required by the Securities and
Exchange Commission and other regulatory agencies. The Enron story makes a sick
joke of all these safeguards.
But the rot consists of more than greed and ignorance. The evolving new forms of
finance and banking, joined with the permissive culture in Washington, produced an
exotic structural nightmare in which some firms are regulated and supervised while
others are not. They converge, however, with kereitzu-style back-scratching in the
business of lending and investing other people's money.
The results are profoundly conflicted loyalties in banks and financial firms--who have
fiduciary obligations to the citizens who give them money to invest. Banks and
brokerages often cannot tell the truth to retail customers, depositors or investors without
potentially injuring the corporate clients that provide huge commissions and profits from
investment deals. Sometimes bankers cannot even tell the truth to themselves because
they have put their own capital (or government-insured deposits) at risk in the deals....
The people bilked in Enron's sudden implosion were not only the 12,000 employees
whose 401(k) savings disappeared while Enron insiders were smartly cashing out more
than $1 billion of their own shares. The other losers are working people across
America. Enron was effectively owned by them. On June 30, before the CEO abruptly
resigned and the stock price began its terminal decline, 64 percent of Enron's 744
million shares were owned by institutional investors, mainly pension funds but also
mutual funds in which families have individual accounts. At midyear, the company was
valued at $36.5 billion, having fallen from $70 billion in less than six months. The
share price is now close to zero.
Either way you figure it, ordinary Americans--the beneficial owners of pension
funds--lost $25-$50 billion because they were told lies by the people and firms they
trusted to protect their interests.
This is a shocking but not a new development. Global Crossing went from $60 a share
to pennies (as with Enron, the market had said it was worth more than General
CEO Gary Winnick cashed out early for $600 million, but the insiders did not share the
bad news with other shareholders. Workers at telephone companies bought by Global
Crossing had been compelled to accept its stock in their retirement plans. (Winnick
bought a $60 million home in Bel Air, said to be the highest-priced single-family
dwelling in America.)
Lucent's stock price tanked with similar consequences for employees and
shareholders, while executives sold $12 million in shares back to the failing company.
(After running Lucent into the ground, CEO Richard McGinn left with an $11.3 million
There are many Enrons, as the lawyer said.
The disorder writ large by the Enron story is this regular plundering of ordinary
Americans, who are saving on their own or who have accepted deferred wages in the
form of future retirement benefits. Major pension funds can and do sue for damages
when they are defrauded, but this is obviously an impotent form of discipline. Labor
Department officials have known the vulnerable spots in pension-fund protection for
many years and regularly sent corrective amendments to Congress--ignored under
In the financial world, the larceny is effectively decriminalized - culprits typically settle
in cash with fines or settlements, without admitting guilt but promising not to do
If jailtime deters garden-variety crime, maybe it would be useful therapy for corporate
and financial behavior.
The most important reform that could flow from these disasters is legislation that
gives employees, union and nonunion, a voice and role in supervising their own
pension funds as well as the growing 401(k) plans.
In Enron's case, the employees who were not wiped out were sheet-metal workers at
subsidiaries acquired by Enron whose union locals insisted on keeping their own
separately managed pension funds.
Labor-managed pension funds, with holdings of about $400 billion, are dwarfed by
corporate-controlled funds, in which the future beneficiaries are frequently
manipulated to enhance the company's bottom line. Yet pension funds supervised
jointly by unions and management give better average benefits and broader coverage
(despite a few scandals of their own). If pension boards included people whose own
money is at stake, it could be a powerful enforcer of responsible behavior.
The corporate transgressions could not have occurred if the supposedly
independent watchdogs in the system had not failed to execute their obligations.
Wendy Gramm, wife of Senator Phil, the leading Congressional patron of banking's
privileges, is an "independent" director of Enron and supposedly speaks for the
broader interests of other stakeholders, from the employees to outside shareholders.
Instead, she sold early too.
With notable exceptions, the "independent" directors on most corporate boards are a
well-known sham--typically handpicked by the CEO and loyal to him, even while serving
on the executive compensation committees that ratify bloated CEO pay packages.
The poster boy for this charade is Michael Eisner of Disney. As CEO, he must answer
to a board of directors that includes the principal of his kids' elementary school, actor
Sidney Poitier, the architect who designed Eisner's Aspen home and a university
president whose school got a $1 million donation from Eisner.
As Robert A.G. Monks and Nell Minow, leading critics of corporate governance, asked
in one of their books: "Who is watching the watchers?"
Do not count on "independent" auditors, as Arthur Andersen vividly demonstrated at
Enron. While previous scandals did not involve massive document-shredding,
Andersen's behavior is actually typical among the Big Five accounting firms that
monopolize commercial/financial auditing worldwide. Andersen already faces SEC
investigation for its role in "Chainsaw Al" Dunlap's butchery of Sunbeam and has paid
$110 million to settle Sunbeam investors' damage suits.
A decade ago Andersen fronted for Charles Keating's notorious Lincoln Savings &
Loan, which bilked the elderly and then collapsed at taxpayer expense--despite a
prestigious seal of approval from Alan Greenspan (Keating went to prison; Greenspan
became Federal Reserve Chairman).
But why pick on Arthur Andersen? Ernst & Young paid out even more for "recklessly
misrepresenting" the profit claims of Cendant Corporation – $335 million to the New
York and California public-employee pension funds. Cendant itself has paid out $2.8
billion to injured investors, but hopes to recover some money by suing Ernst & Young.
PriceWaterhouseCoopers handled the books at Lucent, accused of inflating profits by
$679 million in 2000 and prompting yet another SEC investigation.
The corruption of customary auditing--and the fact that an industry-sponsored board
sets the arcane accounting tricks for determining whether profits are real or fictitious--is
driven partly by the Big Five's dual role as consultants and auditors.
First they help a company set its business strategy, then they examine the books to see
if management is telling the truth. This egregious conflict of interest should have been
prohibited long ago, but the scandal has reached a ripeness that now calls for a more
radical solution--the creation of public auditors, hired by government, paid by insurance
fees levied on industry and completely insulated from private interests or politics....
Enron is unregulated, though it functioned like a giant financial house. So is GE
Capital, a money pool much larger than all but a few commercial banks. Mutual funds
and hedge funds are essentially free of government scrutiny.
So are the exotic financial derivatives that Enron sold and that led to shocking
breakdowns like the bankruptcy of Orange County, California.
The government failed too, mainly by going limp in its due diligence but also by
withdrawing responsibility through legislative deregulation. The one brave exception
was Arthur Levitt, Clinton's SEC commissioner, who gamely raised some of these
questions, but without much effect because he was hammered by the industry and its
Corrupt accountants and investment bankers now have a friendlier commissioner at
the SEC--lawyer Harvey Pitt, whose firm has represented Arthur Andersen, each of
the Big Five and Ivan Boesky, whose fraud case was settled for $100 million.
Pitt blames Arthur Levitt's inquiries for upsetting the accounting industry's self-regulation.
Given his connections, Pitt should not just recuse himself from the Enron case--a crisis
of legitimacy for the SEC--he should be compelled to resign.
Similarly sympathetic cops are scattered throughout the regulatory agencies. At the
Federal Reserve, a new governor, Mark Olson, headed "regulatory consulting" in Ernst
& Young's Washington office. Another new Fed governor, Memphis banker Susan
Bies, has been an active opponent of strengthening derivatives regulation.
But the heart of the scandal resides in New York, not Washington. The major houses of
Wall Street play a double game with their customers--doing investment deals with
companies in their private offices while their stock analysts are out front whipping up
enthusiasm for the same companies' stocks.
Think of Goldman Sachs still advising a "buy" on Enron shares last fall, even as the
company abruptly revealed a $1.2 billion erasure in shareholder equity. Goldman
earned $69 million from Enron underwriting in recent years, the leader among the
$323 million Enron paid Wall Street firms.
Think of the young Henry Blodget, now famous as Merrill Lynch's never-say-sell tout
for the same Nasdaq clients whose fees helped fuel Blodget's $5-million-a-year income
(Merrill has begun settling investor lawsuits in cash).
Think of Mary Meeker at Morgan Stanley Dean Witter, dubbed the "Queen of the
Net" for pumping up Internet firms while Morgan Stanley was taking in $480 million in
fees on Internet IPOs. The conflict is not exactly new but has reached staggering
dimensions. The brokers whose stock tips you can trust are the ones who don't offer
The larger and far more dangerous conflict of interest lies in the convergence of
government-insured commercial banks and the investment banks, because this
marriage has the potential not only to burn investors but to shake the financial system
and entire economy. If the newly created and top-heavy mega-banks get in trouble,
their friends in power may arrange another cozy government bailout for those it deems
"too big to fail."
The banking convergence, slyly under way for years, was formally legalized in the 1999
repeal of Glass-Steagall, the New Deal law that separated the two sectors to eliminate
the very kind of self-dealing that the Enron case suggests may be threatening again.
We don't yet know how much damage has been done to the banking system, but its
losses seem to grow with each new revelation.
JP Morgan Chase and Citigroup provided billions to Enron while also stage-managing its huge investment deals around the world and arranging a fire-sale buyout
by Dynergy that failed (Morgan also played financial backstop for Enron's various kinds
of trading transactions). Instead of backing off and demanding more prudent
management, these two banks lent additional billions during Enron's final days, perhaps
trying to save their own positions (we don't yet know).
Instead of warning other banks of the rising dangers, Chase and Citi led the happy talk.
Both have syndicated many billions in bank loans to other commercial banks--a rich
fee-generating business that allows them to pass the risks on to others (federal
regulators report that the volume of "adversely classified" syndicated loans has risen to
8 percent, tripling the problem loans since 1998).
These facts may help explain why former Treasury Secretary Robert Rubin, now of
Citigroup, called an old friend at Treasury and suggested federal intervention. Rubin's
bank has a large and growing hole in its own loan portfolio. Could Treasury please
pressure the credit-rating agencies, Rubin asked, not to downgrade Enron?
Though he styles himself as a high-minded public servant, Rubin was trying to save
his own ass.
Indeed, he called the very Treasury official who, as an officer of the New York Federal
Reserve back in 1998, had engineered the cozy bailout of Long Term Capital
Management--the failing hedge fund that Citigroup, Merrill and other major financial
houses had financed. Gentlemanly solicitude for big boys who get in trouble connects
Washington with Wall Street and spans both political parties.
In this new world of laissez-faire, when things go blooey, the government itself is
exposed to risk alongside hapless investors--if the commercial banks are lending
federally insured deposits along with their own investment plays or are exercising what
amounts to an equity position in the failed management. This is allegedly forbidden by
"firewalls" within the mega-banks, but when a banker gets in deep enough trouble, he
may be tempted to use the creative accounting needed to slip around firewalls.
"A bank that has equity shares in a company that goes south can no longer make
neutral, objective judgments about when to cut off credit," said Tom Schlesinger,
executive director of the Financial Markets Center.
"The rationale for repealing Glass-Steagall was that it would create more diversified
banks and therefore more stability. What I see in these mega-banks is not
diversification but more concentration of risk, which puts the taxpayers on the hook. It
also creates a financial sector much less responsive to the real needs of the economy."
The fallacies of our era are on the table now, visible for all to see, but the follies are
unlikely to be challenged promptly--not without great political agitation. The other
obvious deformity exposed by Enron is the insidious corruption of democracy by
political money. The routine buying of politicians, federal regulators and laws does not
constitute a go-to-jail scandal since it all appears to be legal.
But we do have a strong new brief for enacting campaign finance reform that is real.
The market ideology has produced the best government that money can buy.
The looting is unlikely to end so long as democracy is for sale....
What Wall Street kept
from the workers
By Fred Goldstein
As the World Economic Forum convenes in New York and bankers from the U.S.
have to circulate among the financiers and capitalists of the world, they will suffer a
After all, the powers behind Enron – J.P. Morgan Chase, Citicorp, Bank of America,
brokerage houses like Merrill Lynch, investment banks like Morgan Stanley, and
other titans of U.S. capitalism – will have to slide delicately past the subject of the
tidal wave of corruption that has surfaced and engulfed their entire political
establishment, both parties, as well as the White House and the Securities Exchange
These bankers are the financial powers behind the engines of globalization. They have
preached the free market, financial transparency, monetary discipline, the rule of law,
and every other pious and hypocritical phrase they could think of to mask their brutal
takeover of economies all over the world.
They have caused untold mass poverty and suffering, cultural genocide and the
destruction of the environment.
Now, because of the Enron collapse and all its fallout, they have been caught with their
hands in the till--investing in phony partnerships, financing tax cheats, shredding
documents and callously gambling with the life savings of thousands of workers.
High-paid corporate executives lied for profit, their accountants swore to it and their
lawyers declared it all legal.
This cast of characters is not new on the stage of history. Only the names have
In 1916, V.I. Lenin, the leader of the Bolshevik Revolution, wrote a ground-breaking
book entitled "Imperialism, the Highest Stage of Capitalism." In it he showed that
imperialism was not a policy but a form of society. The early, competitive stage of
capitalism inexorably developed into monopoly capitalism.
This happened in all the major capitalist countries of that time.
Each one was dominated by a financial oligarchy that exerted control over all economic
life at home and was feverishly engaged in the export of capital abroad--where it could
carry out the super-exploitation of hundreds of millions of colonial people.
The book was written in the midst of World War I, the first great imperialist war. It
described the motive force of the war: to re-divide the globe, which had already been
divided up among all the imperialist powers.
Even a cursory look at the Enron scandal confirms Lenin's writings on imperialism.
A GLOBAL INDUSTRIALIST AND FINANCIER
Enron had 25,000 miles of natural gas pipeline in the United States, 8,000 more miles
in South America, water treatment plants in Britain, power plants in Italy, Poland,
Turkey, Guatemala, Nicaragua, Puerto Rico and the Philippines, a 65-percent stake
in a major Indian power plant--and that's just for starters.
Enron tried to rise above being just an industrial corporation to become a broker and a
trader. Thus it was both industrial and financial. It has been supported and
controlled in this endeavor by the biggest banks in the U.S.
It recruited Brig. Gen. Thomas White to be the head of Enron Energy Services, then
a decade later sent him into the present Bush administration as Secretary of the Army.
It dictated its energy policy to now-Vice President Dick Cheney, a militarist who was
Secretary of Defense during the first Bush administration. It had dozens of Pentagon
Enron is the epitome of an aspiring, new-on-the-scene imperialist corporation. Its
demise has shown to the whole world how a corporation, backed by the banks and tied
to the military machine of U.S. imperialism, can control the regulatory process and use
its financial power to direct the policy of the capitalist state.
On the domestic front, the sudden collapse of a corporation the size of Enron, which
claimed $100 billion in revenue in the year 2000 and had $66 billion in stock
outstanding at its peak, raises numerous questions and issues for both the ruling class
and the working class. But the real issues are buried beneath a mountain of hypocrisy
The ruling class pundits are trying to frame the issue as corrupt corporate practices
versus playing by the rules. They point to Enron's use of partnerships to hide its losses.
They seem to be truly indignant that Arthur Andersen, one of the holy Big Five
accounting firms, actually signed off on these schemes as within accounting guidelines.
They excoriate the prestigious Houston law firm of Vinson & Elkins for dubbing the
whole thing as legal.
Now everyone is suitably outraged.
But the real issue is not one of playing by the rules. The real issue is that even though
they broke the rules, they lost the game. They cost the rich billions of dollars,
discredited the stock market and the 401(k) Wall Street pension scheme and, in the
process, aroused the ire of the masses, who saw 15,000 workers lose $1.3 billion of
their life savings while the executives walked away with more than $1 billion in stock
THEY ALL KNEW.
The truth is that every one on Wall Street knew that Enron was not playing by the rules.
As early as 1999 the German energy giant Veba was contemplating a merger with
Enron. But, according to the New York Times of Jan. 27, Veba backed away from the
deal after the firm "became concerned about the levels of debt Enron had and with
what a senior executive said were Enron's 'aggressive accounting practices.'
Consultants from PricewaterhouseCoopers told Veba that Enron, through complex
accounting and deal making, had swept tens of millions in debt off its books,
making the company's balance sheet look stronger than it really was."
The second of the Big Five accounting firms, PricewaterhouseCoopers was only "one of
several banks and consulting firms that worked on the Veba-Enron deal. Other
advisers included Goldman Sachs, Credit Suisse First Boston and McKinsey &
Company, brokers and consultants said."
"In the wake of Enron's collapse," added the Times, "it has become apparent that many
financial firms-from Enron's lenders to Wall Street bankers who underwrote the
company's partnership, to investment houses that bought into them, to the accountants
who reviewed their books-knew more about Enron's condition than the company
In fact, when Veba backed out, it had concluded that the company's total debt load
amounted to 70 to 75 percent of its value. In short, it was a debt-inflated bubble waiting
"Enron executives enticed wealthy individuals and institutions to invest in one of the
partnerships that helped wreck the company by dangling the prospect that inside
knowledge could potentially help them double their money in a matter of months,"
reported the Times on Jan. 25.
The records show Enron executives offered "Wall Street firms and wealthy
investors inside knowledge about Enron and its off-the-books holdings-information they denied company shareholders."
Some of the biggest corporations in the world were involved, including Citicorp,
Travelers Insurance, Morgan Stanley and American Home Assurance....
While perhaps not all the intimate details of the Enron scams were clear, the general
picture was known all over Wall Street long ago.
If Goldman, Sachs, Credit Suisse First Boston, PricewaterhouseCoopers and other
giant Wall Street firms knew, then Robert Rubin, Clinton's Secretary of the Treasury
and former head of Goldman, Sachs, knew.
The Securities and Exchange Commission members must have known.
The Public Oversight Board that is supposed to oversee the accounting profession
must have known.
Mutual fund managers, brokerage houses, stock analysts, all knew that the Veba
merger had fallen through because of phony accounting.
The word must have gotten to the heads of the Senate and House banking
committees, who hob-knob with bankers.
It is highly probable that word of all this wafted its way up to the Olympian heights from
which Alan Greenspan, head of the Federal Reserve Board, periodically descends to
utter his ambiguous, carefully hedged truisms about the capitalist economy....
NOW THAT THE HORSE IS GONE ...
Now everyone is screaming about regulation, oversight, standards, etc. But no one
rushed to demand regulation of "aggressive accounting" and questionable
partnerships BEFORE Enron crashed-when the parasitic bankers, brokers and other
coupon-clipping parasites were making 212 percent on their investments in three
No one wanted to blow the whistle when Enron stock was rising and all the investors'
portfolios were increasing in value, making them rich on paper.
But now they are all crying foul, lining up to get their money back from the bankruptcy
proceedings--Citigroup, J.P. Morgan Chase, Bank of America, and others that either
participated in the schemes or kept quiet. Lawsuits are flying back and forth....
Today the working class has to learn the lessons of the Enron scandal. It has to
separate its problems from those of the bankers and financiers.
CAPITALIST ACCOUNTING DOESN’T PREVENT FRAUD
The issue for both classes is one of accounting and control. The capitalist class has
minimal central control over the conduct of the giant monopolies, the banking houses,
the industrialists. The monitoring of the ruling class has been largely allocated to the
accounting profession. The capitalist state has little or no responsibility except after the
fact, when a violation is uncovered. On a day-to-day basis, it is up to the accountants.
But the accounting profession is part of the ruling-class establishment. They are a
profit-gouging group of exploiters, just like the capitalists they are supposed to monitor.
Thus, at the end of the day, the capitalist class has no reliable way of preventing
wholesale fraud, because they are all engaged in it. It is part of capitalism.
For the Enron workers, who had their life savings tied up in company stock, and for the
millions of other workers whose pension funds also held millions in Enron stock, there
was no one in this entire affair to stick up for them during all these backroom dealings.
This is what the working class must concern itself with.
There was an unholy capitalist alliance between Enron, its accountants, its lawyers, the
commercial bankers, the brokers, the investment bankers, congressional oversight
committees and the regulators--all either trying to make a killing or covering up for
It's a microcosm of what exists generally throughout capitalism. No one raised one word
about the workers and their life savings. All this took place for years behind the backs of
the working class, in a conspiracy of the rich to protect themselves.
Now 10 congressional committees, the SEC, the Justice Department and others are
trying to get into the act, talking about reform and oversight. But the lesson of the Enron
scandal is that the workers have to have an independent position and defend their own
VANISHED MONEY BELONGED TO THE WORKERS
The first thing to declare is that all this money belonged to the workers. All the money
in those 401(k) plans was wages that had been deferred. This was compensation for
If the managers made it disappear because of fraud, then all that labor, in the millions
of dollars, was performed for nothing.
The capitalist government, which was supposed to protect the workers against this
fraud, and the investors who got rich from it--including not only Enron executives but
the Citigroup investors, the Travelers Insurance investors, the Morgan Stanley
investors and any other parasites who invested in schemes that ultimately devalued the
workers' holdings--should make good on every single penny.
The workers should be first on line as the primary creditors in the bankruptcy
proceeding, of course. But they should not wait in agony during a prolonged judicial
process to get relief. The Bush administration--or should we say the Enron
administration--should immediately set aside funds, not only for the Enron workers, but
for all the pension plans that held Enron's watered stock.
It could start by diverting money from the huge $48 billion increase Bush is proposing
for the Pentagon and its aggression around the world.
The labor movement should get behind a massive counterattack to protect all the
workers who have been cajoled and swindled out of their pensions, which have wound
up in the hands of Wall Street speculators. The workers should fight back against being
tied to stock options and demand guaranteed, fixed pensions instead of having their
wages turned over to a gang of financial gamblers.
The government should be putting extra money into Social Security, not figuring
out ways to rob it and gamble with it.
The working class should find ways to intervene in the Washington struggle over reform
and oversight to protect its interests and not get involved in fixing things for the
But in addition to opening up an immediate struggle, a longer-term evaluation of this
collapse and the revelations surrounding it must be made....
– Reprinted from the Feb. 7, 2002, issue of Workers World newspaper
(Copyright Workers World Service: Everyone is permitted to copy and distribute
verbatim copies of this document, but changing it is not allowed. For more information
contact Workers World, 55 W. 17 St., NY, NY 10011; via e-mail: email@example.com. For
subscription info send message to: firstname.lastname@example.org. Web: http://www.workers.org)
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Last updated June 15, 2009, by The Catbird
June 12, 2001: Originally posted on www.the-catbird-seat.net
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