CalPERS Chief Investment Officer Ben Meng resigned effective Wednesday August 5. This was less than three days after we exposed Meng having made multiple felonious1 false statements on financial disclosure forms as well as holding investments in private equity firms when CalPERS was making multi-hundred-billion dollar commitments to them.2 Since Meng was seen in the office in routine internal meetings Wednesday morning, it appears his departure was not voluntary.
We were also first to break the story of his resignation, via Twitter; you can read the press release here:
We have from two sources that CalPERS CIO Ben Meng has submitted his resignation, presumably due to: https://t.co/mnfZHyd0eG
— Yves Smith (@yvessmith) August 6, 2020
This outcome was a self-inflicted wound. Remember that the Forms 700 that exposed Meng’s misconduct went first to CalPERS, which then sends them to the Fair Political Practices Commission. Apparently no one reviewed the documents, much the less suggested Meng correct them, even though CalPERS’ written policy is that the Form 700 is to be submitted in time so that the employee’s supervisor, which in Meng’s case was CEO Marcie Frost, can review it.
Apparently, no one checked the Form 700 against Meng’s trading records, which CalPERS should also have on file. Apparently, no one even told Meng to amend his form when CalPERS was about to post it on CalPERS’ site. And we will see when we get the results of our Public Records Act request, but it appears likely that CalPERS did not require Meng to recuse himself on private equity investment pitches from the firms whose stocks he held: Ares, Blackstone, and Carlyle.
The people immediately responsible are Marcie Frost, who per CalPERS’ own policy was tasked to review Meng’s Form 700, and the head of compliance, Marlene Timberlake D’Adamo. Timberlake oversees the Personal Trading Policy and has, or should have had, records that showed Meng’s 2019 Form 700 was incomplete. Timberlake reports directly to CEO Marcie Frost.
CalPERS board is ultimately responsible for not holding Frost, Timberlake, and other key staff members responsible for past compliance failures, such as:
The massive spike in personal trading violations earlier this year
The wholesale copyright violation of tens of thousands of news articles, which cost the pension fund millions of dollars to settle
The failure to vet the claimed qualifications of Charles Asubonten, the fund’s former CFO, who was fired after grossly embelishing his work experience
The similar failure to vet the claimed educational endeavors of Marcie Frost, who lied by saying she was enrolled in a non-existent joint bachelor’s/master’s degree program, when in fact she had never matriculated anywhere
The admission that CalPERS wrote down asset valuations last year, which is tantamount to saying that its past financial statements and its reported investment returns were false
This dramatic development is part of CalPERS’ slow disintegration. With every passing day, CalPERS is paying a bigger and bigger price for its failure to learn the right lessons from the criminal conviction of its former CEO, Fred Buenrostro, who took bribes that ultimately came from private equity firms including Apollo and perversely, one of the private equity firms Meng invested in, Ares.
Instead of cleaning house, the giant pension fund conducted an investigation designed to be a cover-up. Instead of embracing transparency as the way to restore its damaged credibility and keep the institution on the straight and narrow, CalPERS instead beefed up its PR department and acted as if all it had to do was manage the spin when it got caught misbehaving. Instead of promoting accountability, board members almost to a person impersonate potted plants and defend whatever staff says even when it is patently false or embarrassingly dumb.
CalPERS accelerated its decay when it chose a white-collar defense attorney, Matt Jacobs, as General Counsel in 2014. Despite having sworn an oath to defend the laws of California and having constitutional duties that make protecting beneficiaries paramount, Jacobs clearly sees his job as shielding the executive team. And that has included thwarting board members in making what at any well-functioning institution would be non-controversial inquiries, like getting senior management resignation letters, copies of procedure manuals, minutes of closed session board meetings, and internal audit reports.
Jacobs has repeatedly sullied CalPERS by regularly telling falsehoods in public, which is toxic model for an institution’s top compliance officer. The examples are too numerous to catalogue in full, but they include misrepresenting the background of tainted fiduciary counsel Robert Klausner, who’d been involved in multiple pay-to-play scandals; brazenly lying about CalPERS’ policies on public comments, and throwing his weight behind fabricated leaking charges against former board member JJ Jelincic.
Matt Jacobs promoted a culture of casual lying that became institutionalized under CEO Marcie Frost, who joined in October 2016. Frost not only defended flagrant resume fabulist, her CFO Charles Asubonten, in the face of incontrovertible documentary evidence of his falsehoods, but as mentioned above, she herself was caught out having told multiple lies not just during her hiring but also on her official CalPERS bio. When then State Treasurer John Chang wrote a letter to the board demanding an investigation, staff confiscated all copies. When the letter was requested under the California Public Records Act, staff took the position the letter was closed session material and a confidential personnel action.
Confirming it was all-in with dishonesty, the CalPERS board refused even to take the basic step of investigating this controversy. So the message from on high was clear: CalPERS would rather risk having a liar in charge than face embarrassment.
Needless to say, this conduct is deeply corrosive. It telegraphs to employees that something is deeply wrong. People whose job it to tell the truth think there is no payoff for doing the right thing, only punishment. This message has been powerfully reinforced by Frost and Meng forcing out some of the few remaining competent executives: Elisabeth Bourqui, apparently for questioning a “private equity new business model” that eventually died under the weight of its own contradictions, and then two highly regarded investment professionals, Ron Legnado and Paul Mouchakka.
Yet the CalPERS board, unwilling to look at its own culpability in this run of escalating scandals, chooses to blame commies under the bed, um, supposed pension haters. In fact, as we have catalogued, these transgressions were all unforced errors that merely adequate oversight would have prevented. There would be almost no bad stories about CalPERS if CalPERS didn’t keep generating them. Although CalPEERS has some competition from the disastrously underfunded and deeply corrupt Kentucky Retirement System, CalPERS under Marcie Frost has done more to damage the image of public pension funds in the US than any other force.
And our experience is when an institution becomes this rotten, not only do the remaining upstanding and capable people leave, but the ones who remain become increasingly obsessed with watching internal plots and cover-ups and devote their energies to making sure they are on the right side of them, as opposed to doing their jobs.
One of the reasons that this cancer has metastasized is that the press for the most part (with some standout exceptions like Mike Hiltzik of the Los Angeles Times) simply parrots CalPERS’ talking points. Apparently news rooms are stretched so thin that soi-disant journalists and their editors can be bought off with the promise of exclusive interviews with the executives of a visibly failing institution. Will reporters finally wake up and start doing their jobs?
This debacle should also be a wake-up call for organized labor, which bizarrely has been supporting public pensions funds like CalPERS as they stumble all over each other to buy more private equity rope which is being used to hang them via breaking unions and private sector pension funds. And it should be a wake-up call specifically for CalPERS.
Labor has been backing Marcie Frost even as she has led CalPERS from scandal to scandal, virtually all of which were due to her lack of administrative ability. Frost is demonstrating that she reached her level of incompetence in Washington, when she was head of a 250-person back office/call center operation staffed almost entirely by clerk typists. She’s been floundering even since she took the helm at CalPERS, with nearly 2900 employees and a large investment operation. An intervention is long overdue.
The one bit of good news here is that Meng’s exodus presumably also means the end of his bone-headed, desperate “reach for all the risk you can find” investment strategy of not just increasing private equity stakes and leveraging the entire portfolio, but going whole-hog into a new area, private debt. That would have required, among other things, a fine-honed sense of timing, in-depth fundamental valuation skills, and sharp elbows, none of which CalPERS has heretofore shown.
Nevertheless, turnover among investment staff is strongly correlated with poor results; Ben Meng’s apparent effort to make himself indispensable by driving out well-regarded senior level professionals has put CalPERS in unnecessary jeopardy. That aspect of this fiasco is also Frost’s doing, since she acceded to his power grab.
It is time for Gavin Newsom to wake up and smell the coffee. It would behoove him to stiffen the spines of his appointees, as well as speak to the two statewide elected officials, Controller Betty Yee and Treasurer Fiona Ma, about the need to leash and collar Marcie Frost before she does even more damage. Ma in particular is in need of what my Jewish attorney called a “Come to Jesus” meeting. Ma has been shamelessly willing to put her presumed good name on CalPERS’ bone-headed ideas, like Meng’s “eat as much risk as we can” investment strategy. As you can see in the embedded document at the end of this post, the city of Pasadena took the unusual step, in the context of objecting to CalPERS’ proposed private debt secrecy bill, AB 2473, that Meng (and by implication Ma, who amplified it) were telling huge howlers with their “more assets, better assets” palaver.
However, this board is so deeply captured by staff, even an intervention by Newsom may not work. The tendency of connivers like Frost is to placate, pretend the storm has blown over, and go back to their old ways. And with no board elections this year, hoping for or even getting new faces on the board will take too long. So the best move for Newsom to rectify CalPERS’ deeply deficient governance is to set up a truly independent inspector general to mind the store.
1 California Penal Code section 118 provides that:
(a) Every person who, …declares, deposes, or certifies under penalty of perjury in any of the cases in which the testimony, declarations, depositions, or certification is permitted by law of the State of California under penalty of perjury and willfully states as true any material matter which he or she knows to be false, is guilty of perjury.
This subdivision is applicable whether the statement, or the testimony, declaration, deposition, or certification is made or subscribed within or without the State of California.
Meng does not have a criminal conflict of interest with respect to his private equity holdings, since amendments to Government Code section 1090, the generally applicable criminal Conflict of Interest statute:
(a) Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.
However, amendments established carve-outs for public stock ownership that result in a high earner like Meng being subject only to civil penalties, which would have to be administered by the toothless Fair Political Practices Commission.
But Meng may still be subject to criminal liability under GC 1090 for a different reason. A reader pointed out that Meng also showed compensation in the calendar year 2019, after he started working for CalPERS, in the $10,001-$100,000 range from Schwartzman Institute in China. Recall Steve Schwarzman is the CEO of Blackstone. Government Code section 1090 is the generally applicable criminal Conflict of Interest statute
2 While Meng could in theory have recused himself with respect to the investments in Carlyle and Blackstone funds, Meng also had created a general conflict with respect to private equity, that any initiative by CalPERS to bring private equity in house or to reduce its private equity investments would be as powerful a signal as CalPERS’ decision to exit hedge funds in 2016, which legitimated withdrawals by other major institutional investors. By contrast, Meng looked to be talking his own book when he stated, “We need more private equity and we need it now”.