Public Pension Funds Victimized

If you are a member of a public or private pension fund, you should read this.

It deals with how the nation's second largest private equity fund, the Carlyle Group, used influence peddlers to get access to pension fund assets. Carlyle is a Washington D.C. based private equity firm with $85 billion under management.

The Washington Post story is more evidence that the investment business is not a level playing field, and uses subterfuge, in the form of "pay to play," or what used to be called bribery, to win business.

This action was brought by the New York Attorney General Andrew M. Cuomo,, who is now the nation's leading advocate for individual investors.

The SEC remains asleep at the wheel, so Cuomo is recommending that his office's agreement to bar Carlyle from dealing with these intermediaries who bribe public officials be used at the national level. I'm sure the SEC welcomes this since they can just get the Word document and put the agreement on their own letterhead. That would save them a lot of trouble compared to doing their own investigation.

Not surprisingly, Carlyle said they did not know how they gained the assets from the New York pension fund system. A Carlyle executive said the firm was "unwitting beneficiaries of a corrupt system" since they paid the money to an intermediary, who bribed unnamed New York pension fund officials. They certainly thought their agent must have been just a great salesman.

Carlyle is known as one of the most powerful firms in Washington and serves as a channel between the government and the private sector. It is politically connected, so its excuse that it did not know how it earned the pension fund business is a limp one.

From Carlyle's perspective, the charges from Cuomo are another way of saying "don't bother us," so they wrote a check for the $20 million fine. The Washington Post article did not mention how much money they firm had accumulated using bribes, but presumably is was a multiple many times higher than their fine. The fine was just the cost of doing business.

Looting Pension Funds
Looting pension funds dates to the take-over mania of the late-1970s when entire companies were bought for the sole purpose of looting the pension fund assets. (Remember Bonfires of the Vanities and Barbarians at the Gates)?

These assets were mandated for plan participants and their beneficiaries. But despite ERISA, the officials who oversee pension assets (the DOL, Justice Department, IRS, SEC), plus state officials did nothing to prevent the looting. This paralleled the rise of 401(k)s which benefit mutual fund companies, banks and insurance companies more than 401(k) participants.

So 30 years later, it is not surprising to see that the looting of the last remnant of pension funds, which are almost restricted to public employees, are still being looted by middlemen, who are only acting as sales agents for the asset management or private equity firms which then get access to the public pension fund money.

The other side of the story which was not part of the Washington Post article was that private equity is a huge business for pension funds since the funds want access to investment which claim they can get higher returns.

The footnote here is that private equity returns are difficult to price, have no mark-to-market values, are illiquid and tie up the money for years. Of course, they carry huge fees, which are paid by the public pension plan participants.

What's Next?
So what's the next part of this story? There are 50 states. Each has many public pension plans. All are susceptible to old-fashioned bribery. Each state has an attorney general. (I bet you cannot name the one in your state.) So do you think this story is ringing any alarm bells in your state attorney general's office?

This should also take some of the bloom off the private equity deal-maker market. If they have to resort to bribery to gain assets, they are just as bad as some mutual fund companies which pay under-the-table commissions or revenue sharing agreement to financial planners to get shareholders to invest in a specific mutual fund. This happens in the form of 12b-1 fees and revenue sharing agreements, and shelf-space deals.

All this is part of selling financial assets in 2009, just as it has been for the past 30 or so years. All of these practices have one common denominator: they all victimize individual investors or pension plan participants.

--Chuck Epstein
cepstein@prodigy.net