Le Show; 2015-12-06

From deep inside your radio. Ladies and gentlemen, a bifurcated list show this week first from Chicago. Some apologies of the week, the president of the nation's largest teachers union. America's largest teachers union is apologized for referring to, quote, chronically tarded and medically annoying children. Those remarks, strangely enough, do stiff rebukes from parents of children with special needs and others in the disability rights community. Open mouth, insert foot, that's what I did, said Lily Exkelson Garcia, president of the National Education Association, writing on her blog, Epic Fail. OMG, no she didn't say that. In my attempt to be clever and funny, I stepped on a word in one phrase and I created another phrase that I believed was funny but was insulting. I apologize. Unquote, she made the remarks during a speech addressing the campaign for America's future. Speaking about her frustration with people who don't understand the full range of what schools do, she rattled off a long litany of teachers' responsibilities. And the video overtalk made the rounds on social media.

Or as we call them these days, anti-social media. Dayline New York virgin media, virgin America apologized to a Dallas attorney after he was banned from boarding his flight and incident at the airline called a misunderstanding, Bobby Abtahi and Iranian American, there is such a thing, was waiting to board his, by the way. If the president of the National Education Association just went on serious exam and took over the Howard Stern, so she'd be fine. Bobby Abtahi and Iranian American was waiting to board his flight on virgin from New York to Dallas when a flight agent informed me I wouldn't be getting on this flight. I asked her why, she said, because the captain and crew did just, just did not feel comfortable with me on board, Abtahi said. She said it wasn't her call, the crew told the agent he'd cut off a crew member on the way into the airport. I said, well, if I, I was rushing to the gate, if I did, I'm sorry, I'll apologize. The agent then returned and told him, no, that's not going to work. They don't feel comfortable with you on the plane. You can't get on this flight. Virgin supervisor came down and apologized, not agreeing with the call, but it wasn't her decision either.

Virgin American spokesman Dave Arnold said in a statement, this was the result of a misunderstanding. We've apologized to Mr. Abtahi for his experience. His experience included having to fly American to Dallas. I apologize for that, sir. A New Zealand advertising company is apologizing after putting up a billboard that made a transphobic joke about Caitlyn Jenner. Quote, I hope your sack is fuller than mine, this Christmas, said the billboard from Cranium Signage, which featured the vanity fair cover of Jenner Photoshop to include a Santa hat. A mother of a nine-year-old transgender boy protested that it was absolutely disgusting. The company has apologized several times, made a $1,000 donation to Rainbow Youth. However, some of those who were offended by the signs say the company's immediate reaction was a little less respectful. According to a screen grab posted online, the owner apologized to one person who complained, but then added, I think you may need to take a look at yourself and relax. If they had to not take life so seriously, I was referring to a Santa sack, your sick mind is the problem. Humor, by Amateurs, ladies and gentlemen.

And another example, Lake Forest, California Councilman Ed, where there is neither a Lake nor a Forest Councilman, Adam Nick, has apologized for telling a reporter that a prosecutor made him feel raped by accusing him of stealing a rival's campaign signs. Nick said he realized his poor choice of words after an interview. Although I use the term rape strictly in its meaning of a gross violation of rights, a friend of mine who's also a mentor to me reached out, and I realized that some people, in particular victims and survivors of sexual assault and physical, forcible rape, may think that I was and I am equating my experience with those of others. That certainly was not my intention. I deeply apologize. A little more than a month after a gas leak was first reported in some of California gas company storage field near Porter Ranch, company officials have apologized to residents at a Los Angeles City Council meeting this week. A leak will take at least three months to be plugged. It's been sipping into the air since mid-October, and now accounts for a quarter of California's entire methane emissions, methane, a very potent greenhouse gas.

Happy Paris Climate Conference, everybody. A Coca-Cola Mexico spokesman apologized and said the company had pulled an online ad after it was deemed offensive to the country's indigenous peoples. The Open Your Heart campaign came under fire with its portrayal of light-skinned white people driving into the remote hills to hand out Coke to indigenous Mexican people and put up a Coke-themed Christmas tree. The message had been misinterpreted to the Coke spokesman. The campaign was intended to be about unity and happiness. Buy some Coke, won't you? The apologies of the week latest gentlemen a copyrighted feature of this broadcast. From New York, this is Lesho, and about a year and a half ago, Eve Smith joined us. She's the proprietress, editor-in-chief, Maven of Nicodcapitalism.com, and it was her curiosity about the nature of the private equity business that drove her to some reporting that she discussed on that broadcast. Private equity is a form of investment different from the stock market

in that it's private, and it had attracted the attention of, among other clients, public employee pension funds around the country, probably because in this zero interest rate environment, they had to look to more exotic investments in order to make enough money to be funded when the pensions come to. What interested Eve at the time was the lack of transparency that afflicted the contracts between these public employee pension funds and the private equity funds that they were investing in. Despite being public agencies, public employee pension funds, seemed to escape freedom of information act requirements or chose to or were able to in terms of disclosing the terms of their contracts with the private equity funds they were investing pensioners funds in. That was then, this is now.

Eve has continued her investigation into the world of private equity and has got an enormous amount of new information, and she's sitting across from me in her studio here in New York City. Eve, welcome back. Harry, thank you so much. All the background about lack of transparency is important, and the reason it's turned out to be of such concern was that about a year and a half ago, the then head of examinations of the Securities and Exchange Commission and her Bowdoin gave a speech that really put a lot of people on their heels. It was an uncharacteristically blunt speech from a regulator. The SEC had very recently gotten the power to oversee private equity firms. They now have to register as investment advisors as part of the Dodd-Frank Act. So you actually can't say Dodd-Frank accomplished nothing. This was actually a very important consequence that very few people really took notice of at the time. And Bowdoin laid out the staggering number level of abuses that they were finding in the private equity.

He said that over half the firms they had examined, and this was all across the spectrum, were engaged in either what amount of stealing. He used much more coded language or serious compliance abuses. And normally even when the SEC goes into an area that they examine, even when they find trouble, it's typically at the smallest firms, you know, the penny anti-wants. The little fish. Right, exactly. The fact that the big fish of engaged in such bad practices is really very disturbing. And then a series of media reports rolled forward. The report is that we're probably most important on this remark, at the Wall Street Journal in Gretchen-Morgensen at the New York Times. But they had a series of exposés on the kinds of, you know, very questionable fee arrangements that the private equity firms had. You know, things, you know, basically the investors, back to your point about the contracts, the investors thought they knew the fees they were being charged by the private equity firms. And it turns out they were being charged lots of sneaky fees, some of which the SEC has gone after. Unfortunately, the SEC has basically

tends to take the posture. It's examination group is the most company-friendly part of the SEC, and the SEC isn't that strong to begin with. But they tend to take the posture that, oh, if we hand out a few, you know, fines to people, everybody else would get the message. So they tend to do onesies, you know, to show the kind of conduct they don't approve of. Wrist slap. Right, wrist slap. So the, even the SEC has gone after some of this stuff, what they've gone after is really small potatoes compared to what appears to be the level of abuse. Did Bowdoin recant or somehow walk away? Yeah, and that was another very distressing part, because you get this very strong speech. And then you're correct on that point. And then around starting in August, and that was in a series of interviews in industry publications or speeches that were reported on in industry publications. He basically started saying, well, anecdotally, we're seeing improvement in conduct. Well, you're an examiner. I mean, anecdotally, doesn't cut it. You know, I mean, and then there were things like, you know, statements like, oh, you know, you're all trying to do the right thing.

And then sort of shockingly, it was spring of the following year. It should be sort of less than a year from the speech. He was at a panel in Stanford University. And basically at the end of the talk, went into this speech about how great the private equity industry was and how he wanted, he thought it would be terrific. If his son were to work in the industry. This, this in a room where probably half the people there were from the private equity industry. And the guy who'd asked the question said, great, I'd really love to hire your son. You know, so Badden was gone three weeks after that. But that, it's sort of shocking that even with the evidence of this level of misbehavior that Badden himself was willing to, you know, basically try to irrationalize it. A couple of definitions before you go any further. In the private equity world, the general partners in a fund are the people who run the fund, basically, right? Yeah, so general, because they, they, they, in theory have the general liability in practice are structured so that if the fund loses a lot of money, it's a corporation and nobody gets hit. But the theory is in a partnership, the general partner

is the person who's exposed to unlimited loss. And then the people who are the past investors. So their role is, the private equity investors get a little more in the way of protection. But you can think of their status as being not unlike an investor in a mutual fund. They're really quite passive. They are, they are by tax law required to be passive investors. And they are called limited partners. And so that's the industry nomenclature. General partner is the big private equity firms. Like you probably may have heard these names KKR, Blackstone, Carlisle, the limited partners are the investors. And they are, and this is another sort of thing that most people don't understand. And most people think that it's rich people who invest in private equity firms. That was sort of true very early in the industry. Now overwhelmingly, the investors are major institutions. In fact, one of our first posts called private equity government sponsored enterprise because those public pension funds we're discussing are the biggest single type of investor. One of the next biggest types are, or fund of funds, which are basically pooled vehicles for smaller institutions

are endowments to participate in. Then the net one of the next biggest groups is private pension funds, foreign sovereign wealth funds. Lots of foreign governments have sovereign wealth funds. There's one in Singapore. There are two in Singapore. There are a bunch in the Middle East. There are big investors. So most of the investors are quite large. And the one you've been focusing on for most of the last year with a wave of new reports this very week is one that's called CalPERS, which is the California Public Employees Retirement System. Is that the largest public employee's pension fund in the country? Yes, and they get disproportionate attention of all of the public pension funds in America because they've long been perceived to be the most professionally managed and the most sophisticated. CalPERS really came to glory in the 1990s when it decided, in fact, when its board members led this move, it decided to engage in corporate activism. And that turned out to be a very profitable strategy for them.

When they would go after companies and demand that they basically clean themselves up, those stocks actually did very well. So it was sort of a win-win. It was a win for sort of investors as a whole. And it was actually a good thing for CalPERS to do. And so their leadership in that really garnered them a lot of positive attention, aside from the fact that they've also, are just being so large, they also run, at least historically, have run themselves on a more professional basis than any of the other public pension funds. And their beneficiaries would be as public employees of California, firemen, policemen, not teachers because they have a separate fund. The teachers have their own fine lights. Yeah, rest so, you know, and the other, you know, and the more municipal, a lot of municipal governments contract their pension fund management to CalPERS. So a lot of, so they're actually a lot of city employees. Sanitation workers. Right. Right. Right. Right. So what's CalPERS doing in your current findings that we should know about? Well, the thing that's been a little disappointing

is that CalPERS has been, we've used CalPERS to focus in part because in some ways, they actually are more transparent than the other public pension funds. In part, that's because they're subject to California's version of FOIA, which is one of the toughest ones, so that when you want to get information, you're more likely to, and CalPERS plays it, everybody's in journalism knows that it has found out that people who recipients of FOIAs tend to fight them. But CalPERS has generally played fairer. FOIAs are freedom of information after requests. But information after requests. In California, it's called Public Record Act Requests, but we'll use FOIA just because it's, you know, here, because it's more commonly known term to most people. CalPERS tends to play fairer, and CalPERS in the early 2000s in a settlement of a FOIA started disclosing private equity data. So that was the first return data on a fund basis every quarter. So that was the first window that people really had into how the industry was doing. Return data, meaning how CalPERS investments are.

How about this is where we're performing. So every quarter they would list. This fund has returned, you know, that we put this much into the fund. We've gotten this much back so far. Here's what we're told, the remaining value is, and here's what the rate of return is. Now, the rate of return, we may get to this, the way the rate of returns are calculated in private equity, are iffy, and it's a bad convention throughout the industry, but at least they started disclosing this information. And in fact, even now, a lot of it's common within the industry that people will look at CalPERS, you know, as they're sort of the term sheet for, you know, how's this particular fund doing if CalPERS is invested in a fund? So that's been, it was a very important step forward. Now, what's happened with CalPERS is that as these, you know, questions about private equity have come up, that have been raised, you know, through the SEC, through the media, the reaction of CalPERS when these investments have been questioned, has been to circle the wagons. And this has also been the response of other, other of these investors,

these limited partners that we talked about before. And it's, again, as you pointed out earlier, it's partly because the investors have convinced themselves that investments like private equity, as well as hedge funds, now how CalPERS actually to its credit has decided it's no longer investing in hedge funds, are the one way they can meet their return targets. This is an idea that I've challenged a law of the blog based on work with academics, that there are other strategies that CalPERS could use that involve a lot lower fees that look like they would be able to hit the same return targets. But there's almost a stock home syndrome. I mean, the limited partners feel very much the need to be in private equity. They react very defensively when the idea is criticized. And they've basically fall back on, you know, there is no alternative excuse that we must be in private equity because it produces these superior returns. You've also reported, if I'm not mistaken, that there is a not-so-subtle threat by private equity fund managers

that if their investors tend to be too leaky, the set investors may not be invited to the next fund that's created and therefore are shut out of these supposedly lucrative investments. Yeah, and the reason that that's silly is one. You know, the public pension funds together about 25% of the money. I mean, they're just massively important as customers. As customers. If not, sockers. Yeah, and the second is that to the extent that there's not the evidence that this happens is not strong. There was a famous case in California right after, in fact, right after, CalPERS made its announcement that it was going to provide this data of two funds, if I recall, it was a scoring client of Perkins, said, oh, we're not going to let anyone in who's going to make our data public or might make our data public. Well, those two funds had never gotten a lot of money from public pension funds. They were an inconsequential customer base to them, so this was sort of an empty thread.

And the reason it was believed that they were not wanting that information is closed was that they had some lousy foreign funds and they were planning on raising new foreign funds and they didn't want to expose what dogs their funds were. That's excused in the world. Yeah, exactly. So the extent people made excuses they looked to be awfully self-serving. Now it is true that if a fund is perceived to be a hot fund, the general partners, the private equity managers, are going to basically go to the people they regard friendly as first and they're going to go to the ones they regard as being more difficult to deal with last. The flip side is that's not as big as threat as you would see because hot fund doesn't necessarily translate at all into investment performance. There have now been, there it used to be, and this again gets a bit technical, it used to be that somebody who had launched a high-performing private equity fund. There was a basic, it used to be, you know, roughly 10, 15 years ago, that there was a 50% chance,

which is much better than chance, that their next fund would be a good fund too. So you would want to sort of, you know, you would want to stick with a guy who looked like he had a hot hand. Now that tendency is completely reversed itself, the people who have had the so-called top court tile funds, their next fund is actually less likely than 25% to be a top fund. And that's before the fact you don't even know how the fund has really done by the time they're asking for more money. It's only four to five years into the fund. There have been funds that have had exceptional returns, close to 80% at the time of the fund raising that turned out to have mediocre returns, approaching 10% by the time the fund was all wound up. So basically, these people are throwing darts much more than they want to admit to themselves. And if they do not access to particular funds, the ones they wind up in are probably no worse. I mean, the whole sort of basis of the argument is really absurd. One is reminded of the claimers that often appear at the end of commercials for investments that are advertised on television, which is past performance is no guarantee of future results.

That's correct. That's correct. And then this idea of which funds are better is actually much more important to the whole argument of whether you should invest in private equity at all. Again, the most outsiders would perceive. It was very telling last week that Dean Starkman of the Los Angeles Times wrote an article about some new fee disclosures that were just made by CalPERS. And the headline was basically said it's not clear that private equities worth all the fees that it charges. And it used to be you would almost see either a litany of praise for private equity in the media, or pretty much no discussion of at all. So the fact that a paper of the prominence of the Los Angeles Times has as a headline is private equity worth the fuss is a real sign of a beginning of a shift in the tectomic plates in terms of how the industry has perceived. Of course, that's right before they fired a little bunch. Sorry, bought out a lot of people at the L.A. time zone. Totally quits it out. So I want to get to what you've been talking about lately, which is these board meetings, which the board of now a board of directors of any organization is supposed to

theoretically supervise management, ask questions if they have questions, inspect the business practices if they're any doubts about what the business practice. I mean, this is true of private or equity or any public corporation, right? Right. That's correct. And two of the board members at CalPERS are publicly elected officials to state treasurer and the state comptroller. Right. But there's one board member that you've been spotlighting, J.J. J. J. J. Linsick, who is in the habit of asking questions in public of staff members of the agency in question, which is the largest public employees pension fund in the country, about those investments in private equity, take us through what he's been experiencing and what the reaction is. Yeah. This has really been quite extraordinary because J.J. J. J. Linsick has been asking what should be pretty basic questions in terms of private equity? It's not as if he's asking stump the band kind of stuff, you know, about the fees.

And what's been striking is, and this sort of happened a few months ago, that he would get answers from staff that were either evasive or suggested they really didn't understand what they were investing in. And literally, in one sequence, which I discussed at length in my website, I am told there is almost a 50-50 split in the general partner community. And these are people who deal with CalPERS as to whether the head of private equity, Rayal DeRoshe, really didn't know what he was talking about. Or just, you know, got sort of caught in his own evasiveness and tripped. But the fact that the general partners themselves think that Rayal DeRoshe may not know what he's talking about is, you know, is rather alarming. And just to repeat, he is the guy who runs private equity investment for CalPERS. That's right. Responding to the inquiries. That's right. And what has increasingly happened is that the head of the, and the investment committee CalPERS is a committee of the whole. So the entire board sits on the investment committee.

Increasingly, the head of that committee, Henry Jones, has started taking the posture that JJ is asking too many questions. So he will start trying to shut JJ down before he's even heard what some of his fairly few in number questions are. And the only reason JJ's questions some time take a long time is because staff is being evasive and he's trying to get to the bottom of it. But then the sort of next step in this chapter is that the evasiveness is a sign of a governance problem. JJ has asked for records from staff and has been denied them. Every law professor I've spoken to and every other person who's an expert in governance, you know, people at people at McKinsey who regularly deal with boards are to a person appalled that a board member would not be given information when he asked for it. And then, and then Jolensick has on basically the, he submitted three foils, but it really was effectively two because one was a duplicate of the of, of, of subsidies submitted to, to foils.

And the board is up in arms about this and is literally talking about coming up with sanctions. I talk about this in the policy as if this is, you know, everybody but is clearly directed at JJ when that's expressly against California statute. I mean, this is, this is madness. Then we learn because a board member made a sort of toad hops out of his mouth disclosure in a governance committee meeting that the reason we see so few questions at CalPERS board meetings. And my readers have commented they don't understand why the board seems so passive is that the board members are extensively pre- briefed before the meetings. That is a, in private, that's a violation. It's a clear cut violation of the Bayglet-Kena open meeting act. So basically, if JJ pulling on this private equity thread has exposed to hold counterworms at CalPERS in terms of how they're running themselves. I mean, it's really appalling. This is a public agency, which is mandated by state law to have open meetings in public, which is supposedly doing a work around

that provision by having private briefings before the public meetings where staff chooses which board members to tell which information to, with the implied goal of keeping these discussions from erupting in public meetings. That's right. They basically don't want to have open debate and descent. So in a few months, divide and conquer strategy, right? You know, if two board members privately voice the same concern to staff and have them asswaged, they don't, you know, if they discussed it together in an open meeting, they might, you know, push their thinking further and conclude that it's a real issue. So, you know, they're all kinds of other parts of the stage management that are going on that are very disturbing. This is what is called in legal proceedings exparte meetings, right? Right. Which you're not supposed to have, except under very limited circumstances for that very recently. Yeah. Yeah. And then there's a guy that they're proposing to hire at CalPERS.

No, they have. They have. I have hired him. They have hired him. Which is, his name is Robert Klausner. And he is in the sensitive role of fiduciary counsel. Okay. Before you go any further, just define for us what fiduciary responsibility is. Yeah. Okay. That's a very important point. Fiduciary duty is a very important concept under the law. A fiduciary is a party who is basically an agent of someone else. So, you can think of that as being you hire a stock broker or you hire someone to the classic one is a trustee. You hire someone, you know, you're out of, you know, you're on the other side of the country and you have to have, even though you want to oversee it some, you hire someone to manage the affairs of say your, my farm, your farm, your farm, or a relative who can't take care of themselves, right? You've given some money and you can't watch the checkbook all the time. So, you hire somebody to perform in that role. The fiduciary is the highest standard of care under the law. They are supposed to put the interests of the person

they're responsible for over their own. I mean, it's a very, very high standard of care. So, pension funds are fiduciaries. They are supposed to put the interest of their beneficiaries. So, that's all of those CalPERS people who fire men and people. Fire employees and sanitation workers and, you know, economists and, you know, it's a whole range of people. It's also economists and the government. You know, so it's, you know, it's the white collar workers, as well as the ones we think of. But we're not supposed to care about it. We're not supposed to care about these people, right? So, they are supposed to be CalPERS as an institution and it's board overseeing CalPERS very top priority. That's basically the concept of fiduciary duty. And now, Mr. Klausner has been hired as the... fiduciary counsel. That, and again, the relationship's a little complicated. He is an advocate to the board, but the staff effectively hires him, which is a bit problematic. It was the staff that did the screening, the staff that made the recommendation,

and the staff's the one that cuts... The check is actually mechanically cut by staff. That's not as if, you know, the board members have their own little bank account. And, you know, they are the ones actually writing the check to the fiduciary counsel. So, we already have this problem of who's he really working for. But in theory, he's to advise the board on what their fiduciary duties are, on how to perform, how to meet the standard of executing on their fiduciary duties. And why should we care that they hired him? Well, first, he's not a California lawyer. That's already a problem, because under Cal... As fiduciary counsel, his job is to give legal advice. He presented himself in the interview as giving, well, it's not a problem, because basically I'm going to give you policy advice. Well, then you can't be fiduciary counsel. You could be a business consultant of some sort to the board. You could possibly serve an addition to a fiduciary counsel, but you're not qualified to give any legal advice. Now, he also had the finesse that we have two partners in the firm who are California lawyers. He's been giving advice directly to the board.

He's never picked up the phone and called any of his attorneys... And any of these questions that relate to California law that come up, so he sure looks like he's giving legal advice on the state of California. Now, that may sound like it's a technical matter, but the reason it's particularly troubling is in the states where he is licensed as a lawyer. He's given advice, which is very disturbing. In fact, one, you know, attorney I had who looked to look at some of his opinions, basically said he's in the business of giving aggressive client-friendly advice, which is not well-supported by case law, which is basically he tells the clients what they want to hear and they're not well-supported by case law translates into... They're running a real legal risk. It's not that he's going over the edge of what is... You know, there's evidence that you can see that he's going over the edge of what is sound. The example right now is the lawsuit against one of his longest standing clients, which is the Jacksonville police and fire pension fund. He's had them as a client, it's 1987. Jacksonville, Florida.

Jacksonville, Florida. And the base of Clouster's business, I should back up, is funds that are completely unlike CalPERS. His bread and butter business are the small and very unsophisticated police and fire funds. And to the extent he's gotten into bigger funds, they are not paragons of... A rectitude? A rectitude. I mean, one of them is the Louisiana pension fund. Detroit was one of his clients where he was fiduciary counsel. Three people have been successfully criminally prosecuted at the Detroit pension fund. You know, so he's got a very disturbing track record. But the Jacksonville one is probably, you know, is the one that's gotten the most attention due to the attention of a group called Florida Tax Watch and then some very, very dogged reporting by the Florida Times Union. Basically, this fund came under attention around 2008 because it was severely underfunded. It's one of the worst underfunded pensions in the country. And then it came out in 2012 that the fund had a longstanding created in 2000 secret pension fund

for the top officer of the fund and two trustees. Clouster had written an opinion in 1999 to support the creation of this fund. Again, the attorney had looked at it said basically that it was legally unfounded, that the only authority he cited was a state attorney general opinion, which said very little. And to the extent it said anything, you could actually read it as reaching the exact opposite conclusion to the one Clouster asserted that it made. By contrast, the Jacksonville, when it created, the bigger pension fund. So there's a bigger pension fund. There's a bigger pension fund that takes care of the police and firemen. And there's a special pension fund that covers these three people. The Jacksonville statute that created the public pension fund said that the pension fund trustees and administrators could only administer the fund. They could make changes in the terms of the fund. And similarly, the state statutes basically say, you know, so it's basically the only way they could have legally gotten this created,

at least according to this lawsuit, which everybody who looks at it says is quite sound, would either to have been had the city of Jacksonville approve it or to have gotten the Florida state legislature to approve its creation. Neither of which. Neither of those happened, right? Neither of those happened. And the pension is quite egregious. You know, the pension, the head of the, his name is John Keane. His title is executive director and fund administrator. And he's generally referred to as fund administrator. And that's kind of a funny term because it generally means something else in the pension fund industry. But he's the head. He's the day-to-day head of this police and fire pension fund. He gets between the two pension funds. He gets 67,000 from his regular one as a former fireman. And he gets close to 200,000 in total with the addition of this other pension fund. The secret senior staff, the senior staff pension fund. He started drawing on it, even though under IRS rules, it doesn't look like he's retired. Because he rolled basically from being the head of the pension fund to being a quote consultant to the pension fund

with pretty much no interruption. The pension fund is so lucrative that he's paid. It pays $41,000 in excess of what the IRS considers to be permissible. So then, again, without the approval of the Jacksonville city, they wrote a provision to allow for this excess payment. The city said when they found out about this pension fund to the fire and police chief pension fund to cut this out and dissolve it, they did nothing. They then tried going to the governor and the state attorney general to get them to do something, this being a GOP laissez-faire state. They did nothing. And the city has finally sued them. The city has sued the pension fund. The city has sued the pension fund. And John Keen, the head guy who's got the biggest pension, and they've demanded that Keen get back all the money. And that's what suit was filed a few couple of weeks ago and people who've looked at it say the suit looks very strong. It's very clean and well argued. And the money that is going into the senior... Special senior staff...

Oh, and this is the rich part. Yes, we've missed the richest part. Okay. So the underlying pension fund is greediously underfunded. It's in the bottom 1% in terms of underfunding of all of the public pension funds in the U.S. In 2012, when the city told them to cut it out, they super-funded. Super-funded, the senior fund. So they basically looted the underlying fund to make sure the senior staff fund had more than enough money to pay its obligations. And for Keen, the net present value as fund is something like $2 million. So it really was a poke in the eye of the city. I mean, they've gone out of their way to be offensive in their content behavior. If one wanted to be tabloidish about this, this is taking money out of the pockets of retired police and fire men in Jacksonville, Florida to give... To Klausner's clients. And this is the man who is now advising CalPERS. CalPERS, right. And has this background been made an issue at CalPERS board meetings? No.

At the time when Klausner was put up for approval along with... I think there were three other candidates. There were three candidates where they were given written documentation and the two were interviewed. Several members of the board, including one who is usually very staff friendly, complained that they were given much less information about the candidates than they had were typically given. That they had been given the past times they've been asked to approve fiduciaries. Then background folders. Then background folders. So that, to me, we don't know whether this was defective due diligence by CalPERS staff or whether they knew but the fact that they gave less information than normal looks awfully suspicious. And this is the man who is now advising CalPERS. And he has now been hired as now in the process of advising CalPERS board fiduciary responsibility. That's correct. fiduciary duty. That's correct. And the CalPERS staff from what you've been reporting lately seems to be undertaking some actions that would to the casual reader

be aimed at shutting up this one dissident board member, JJ Jolinsik, and trying to quash his ability to continue to ask potentially troubling questions in public meetings. Right. Now, it may have started sooner, but the first sign that I detected this was in a September and another committee they have is a governance committee meeting. And these are all, you can actually either watch them live or you can see the video archives later. In a September governance committee meeting, they were basically having what looked like a brainstorming session about things they could do to improve board policy. And one of the board members, pream author, and ironically, this is coming from the board member who has been cited with ethics violations and stripped of being vice chairman, find and stripped of being vice chairman of the CalPERS board as a result. She advocates that there should be sanctions for board members for submitting public record acts or these, again, these foius.

Now, this is clearly directed at JJ. He's the only one who does this. And what's very disturbing on the tape is she looks, she's seated between the General Counsel Matthew Jacobs and next to another CalPERS staff member. And at the end of her remarks, she turns in both directions and says, did I get everything? So she's clearly talked extensively to staff about this. And which raises the question, did she cook this up? Did staff cook this up? Who cooked this up? But the point is this was definitely done with her body language and her, if you look at the sequence, it's crystal clear that staff had significant input to this. And Jacobs, the General Counsel of Counsel, should know better that it is clearly against California statute to deny a board member a government official access to public records. It is crystal clear in the statute. It's one of the first provisions, it's right after the definition section. They say that government officials have the same right to obtain public records as the members of the general public. What do we know about what CalPERS might be trying to defend

with these tactics, the CalPERS staff? You know, that's the part. It sort of boggles the mind. I think they've gotten into a bunkered mentality. I mean, if you wanted an approximate cause, they're very defensive about their relationship with private equity. You know, I think it's very reminiscent of that sequence in what is that famous Jack Nicholson movie where he gives that rant about you couldn't handle the truth. Oh, a few good men. Yeah, a few good men. So, you know, I think they think the public couldn't possibly handle the truth about private equity. They would draw the wrong conclusions and we must defend this investment. You know, basically the children can't know the parents have sex. You know, it's sort of that level of, you know, the parents do what? Exactly. Oh, man. And, you know, one of the symptoms of that was that, again, as a result of this sort of, we talked earlier about the CalPERS head of private equity stumbling over himself in response to these questions by J.J.

Jolensik, then they had basically a half day workshop on private equity for the board, which appeared to have multiple motivations. You know, the nominal purpose was to educate the board. And, aside from Jolensik, the board really is sort of embarrassingly unknowledgeable about private equity. A couple board members have asked, you know, what amount to put food in mouth and chew kind of questions in terms of their understanding of investments in general, not just private equity. And so, on the one hand, there is sort of a legitimate educational purpose here. But just read, you could also tell in fur, reasonably, if there are other, you know, reasons for making this presentation, one was to shore up CalPERS image to the broader world. We really do not were talking about and doing in private equity. And the other one was to make a case as to why we need to invest in private equity. And, you know, one of the parts that I found particularly disturbing about this whole workshop was the degree to which they cooked, you could really trace through and every finance professional who looked at it also commented on this. They really cooked the numbers to make private equity look better than it was.

So, it's true, is it not that some of the richest people we hear about in the American one tenth of one percent are some of these general partners? Oh, no, that's absolutely correct. In fact, when you parse through the data, and this is one thing which people who study the inequality data know, but I don't know that the general public appreciated to the same degree, is it when you're talking about the top one percent? It's actually quite different than the top one tenth of one percent. The top one percent, you've got a lot of people like CEOs, top sports people, top entertainers, the super duper heart surgeons, people like that. When you get to the top one tenth of one percent, it is almost overwhelmingly top hedge fund managers and top private equity managers. And again, substantial investors in both of strategies are these public pension funds. And the real irony here is that some of these people are among the most aggressive in going after the idea of public pensions.

For instance, Stan Druckenmueller, who was basically the head manager at Soros Fund Management, has long been a big Republican party back, or he backed Newt Gingrich, and he's been quite hostile to public pension funds. There's a group now affiliated with Kenneth Griffins and Bruce Rauner in Illinois that are going after public pension funds. Bruce Rauner, the new governor. The new governor, right. So basically, it's not just that the case for private equity is questionable because the fees are high, because it's all of this corruption and stealing that the investors seem unwilling or unable to stop. And the SEC is only giving slap on the wrist. These guys are literally funding people who are out to shut them down. Now let's get back to Mr. Clauser for a minute, because as I read your reporting, there's another facet of his background that's interesting and related to this. He has, aside from his jobs, serving as counsel to these pension funds, both large and small, both Jacksonville and now CalPERS.

He has this business of holding educational get-togethers supposedly for pension fund managers. Yeah, and this is a little iffy also. I am told by Chris Toby, who was a trustee at one of the public pension funds where Klausner was a counsel. That Klausner is the only lawyer in the country who runs this kind of seminar. And there aren't that many people who run these particular kind of seminars to begin with. But basically, they are what is called a pay-to-play model. The people like the police and fire pension fund, you know, trustees and top staff members who go to them do not pay any money. They are the product that is being sold. The people who pay money for these conferences are people like class action law firms or fund consultants who come for the opportunity to quote, educate these people, you know, hang out with them on the golf course, have meals with them, so forth, and so on. So they are given access to a select group of people with money.

And people like Ted Sedell, who was hired by Jacksonville to do the forensic report on what's happened with both the special pension fund and the pension fund overall, has basically said that there's really no justification for these kind of seminars that to the extent that there's educational content it's questionable and it opens up way too many opportunities for corruption. You know, interestingly, Toby himself, when he was at the Kentucky retirement system, had to fight to go to educational courses taught at Harvard and Stanford. Everyone else was going to the class, and it was a big issue for him to go anywhere else. If I put what appeared to be two and two together, then it might appear that Klausner uses his connections with pension funds for which he serves as legal counsel to set up the ability for other private services renderers to have access to the officials of these funds

to presumably the mutual benefit of those private practitioners and of Klausner himself. Yeah, that's correct. That is profiting off of his relationship to the people who have hired him. That is correct. Yes, the optics are very bad. And the substance would appear to be very bad. In fact, there was one case, and again, Sedell has been doing this kind of, what he calls forensic work for quite some time. He used to work at the SEC, and he was a whistleblower at Putnam. But in the early 1980s, and here's, you're going to love the self-looking ice cream cone aspect of this. One of Klausner's presenters at his, so they were giving him fees at his shindigs, was Meryl Lynch consulting. And it's problematic to have a fund consultant, which is also providing brokerage services as Meryl Lynch was at the time, because then they can churn so forth and so on.

They're both selling and buying. That's right. And the people who were using this Meryl Lynch consulting service were in sort of the bottom third in terms of performance, with the funds they had that were managed according to the advice that was given by Meryl Lynch. The SEC started investigating this practice in the early 2000s, and in fact, this led to a wave of critical articles, one in the New York Times, and particularly one in Forbes, that mentioned Klausner, but he more is being on the, you know, as part of this practice as opposed to central to it. But nevertheless, they discussed at length, you know, the Meryl Lynch case, Sadell had warned the Jacksonville Pension Fund in 2002 that they should dump Meryl Lynch, even before the SEC was onto this, that they were a problem. Jacksonville then advised by Klausner, Klausner getting fees for Meryl Lynch, ignored this, and then ironically, after the SEC sanctioned Meryl Lynch, there was a private class action lawsuit. Klausner had Jacksonville join the lawsuit and got a cut of the fees

from the class action lawsuit against the firm that he'd gotten paid to play fees for. Now, you've reported all this in the past week or so. Has there been any response from representatives of Mr. Klausner or from Klausner? Klausner's practice is to remain completely silent on these matters. I doubt that Calpers will say anything publicly either, because if they acknowledge it, it's highly embarrassing. And we have had the Thanksgiving holiday intervene. I suspect Calpers first reflex is going to be to hope that this just all blows over, which frankly is incredibly unwise given Klausner's track record, and given what's rolling forward in Jacksonville. He's currently defying a subpoena from the City Council. He's hired a criminal defense attorney, an expensive one, which suggested he thinks he has liability. He probably can get away with ducking the City Council's subpoena. He's refused to turn over records, which he should be perfectly willing to turn over

if everything was on the up and up. But the City Council's sort of subpoena is my understanding, I'm not expert in Florida law, but I believe their subpoena is limited in geographic reach. So I, you know, he ain't in Florida anymore. Well, I think he literally just literally have to not go into the county. However, with this civil case they file going forward, presumably they will be issuing similar subpoenas under that. So ultimately, he's not going to be able to escape this. I don't know how Calpers is going to be able to stand by an attorney when, you know, six months a year from now, the dirty, worst day, you know, 18 months, two years, the dirty laundry is exposed. I mean, this is going to be, you know, the headlines are going to be terrible. I mean, if they were wise, they would dump him immediately. And they don't seem to be willing to admit they've made a mistake. Now, let's back up and take a longer view of all this. I seem to have this understanding from what I've read that most studies seem to indicate that for normal investors, like me or you or anybody else, but you're not normal here.

I'm more expert. That sort of passive investing is at least as lucrative as active investing, as attempts to game the market or to, you know, have some strategy that you're constantly jiggling and turning. You have put your finger on the nut of the station. I'm glad we returned to this. The, yeah, the whole logic of passive investing. And we were sort of talking about this earlier with sort of what a crapshoot it was to try to pick a private equity fund. The same way it's difficult to pick a stock that's a winner. How can you pick a private equity in firms going to win a particular when you're basically competing? You're in the same position as people like you and me trying to compete in the stock market. You know, how are you going to out compete? How are you going to find them? You really can't. And so if you do better, it was probably luck. You're like kidding yourself. And you're better off adopting a passive strategy. And the advantage of the passive strategy is all these fees to consultants and managers go away. Or like you're substantially reduced, right?

I mean, you do probably want to do some check to make sure the contracts are not more horrible than the standard contract. But, you know, the industry norms, but beyond that. The reason this is a particularly big deal in private equity. And this was came up quite explicitly. And I was surprised it was so explicit in back in that workshop we mentioned. In the presentation by Calper Star Witness, a Harvard Business School professor named Josh Lerner, was that, and he literally said that the performance of private equity, to the extent there was outperformance, that it was so modest that it really wasn't worth the bother, unless you could be in better performing funds. Well, you can't do that, right? I mean, you can't hope to do that on any kind of, you basically say, I hope to be lucky. You can't plan on it. And it's not prudent as an investment strategy to plan on it. And then that's before you get to the fact that, you know, and it was sort of very surprising. Again, I mentioned this Los Angeles Times article that you had both someone who had been a top advisor to Arnold Schwarzenegger. So the conservative ended the spectrum.

And he's been, you know, hard on public pension funds, saying that he didn't think private equity was justified as an investment. Because the fees were so high that you really should be getting more in the way of returns to pay this level of fees. And you similarly have Governor Jerry Brown asking CalPERS to lower its return targets in the light of this low interest rate environment, in part because that's reality. But specifically, specifically his reason was that the high return target was forcing funds like CalPERS into overly risky strategies like private equity. So we're hearing this from people who, you know, frankly, because private equity has so much money to throw around. Historically, everybody's been willing to sing the private equity hymnal or at least keep their mouth shut. You know, the now the case for the industry is becoming so, is now becoming recognized to be so questionable that you're even seeing politically connected people starting to question it. On both sides. And again, this would be sort of a living room matter if it concerned the investment practices of the rich and the famous. But this concerns the investment practices of pension funds that are legally bound to be paying the pensions of our police, our firemen, our city accountants.

And that's ultimately a taxpayer responsibility. That's why this may sound like this is very arcane and not really related to ordinary people. But, you know, for CalPERS, this is of concern to every California taxpayer. And you've got this, you know, similar issues at the other, you know, not as giant but very big. California Public Pension Fund CalSTRS, they're sister and sacramental teachers. The teachers retirement fund, right? We're talking about lots of people. Lots and lots of people. I don't think this topic is going away any time soon. This is one of these things where it's going to be on at least a slow burn for quite some time. Because I think it points to sort of bigger problems that, well, one of the big problems that was actually flagged in a financial times article is we've got a problem with pensions and supporting retirement generally in this country. And one of the problems is the attack is directed on the public pension funds. They're the ones that are sort of the, you almost want to say the canary in the coal mine because you can see these big underfunding problems. They went from looking like many of them went from looking like they were overfunded in the dot com era when the stocks were in the, you know, in the stratosphere.

And, you know, now many of them are under most of them are underfunded and some of them quite CalPERS is only somewhat underfunded. But enough to be worried, you know, worried about it. And, you know, with the slow interest rate and super low interest rate environment, you can't make enough money on safe investments. So the fed as a matter of policy is pushed people out in all kinds of risk where you can yell at the public pension funds. It's even worse for the average retiree. You know, the Wall Street's remedy tends to be, oh, let's the Bruce Ranner, you know, so for the remedies, let's shoot the public pension funds and let the grant and watch public infests. That's they do everything less professionally and with more fees. So privatizing this problem does not make it go away privatizing this problem merely makes the fumbling around more lucrative for Wall Street. You know, it's not a good solution to this problem. I mean, you know, there really needs to be, and it's, you know, much more than we can, you know, we're sort of wrapping up our time. It's a much bigger topic, but there really needs to be a fundamental rethink of how we provide for the retirement of people in that this, you know, this model is coming under stress, under very severe stress given this super low interest rate environment.

And it's also banking life, bankrupting life insurers. It's not just, you know, a pension fund of receiving for retirement issue. So the clues that they keep you drop that this month might be the month that the Fed decides to start raising interest rate might mark the beginning of the end of this particular period of financial craziness or might not. Well, it's going to introduce a new set of problems because the adjustment is going to impose costs on people, right? You know, everybody who is exposed to riskier assets, those assets tend to go down and typically go down in price when interest rates are higher. So on the one hand, if the Fed could eventually get there to a higher interest rate environment of, you know, at least interest rates, you know, somewhat higher than the inflation rate. So that investors were being paid for putting their money at risk, then you could see funds like CalPERS put a lot more of their money in bonds, which is where pension funds traditionally put most of their money because you could match the maturity of the bonds.

You know, and the payouts of the bonds fairly well to the actuarial profile, you know, they have these people actuaries who actually look at death rates and do lots of complicated statistics. The time linking of money in and money out would become aligned. Right. So, you know, you really in a normal environment, somebody like CalPERS or somebody like, you know, normal Joe, you know, you basically should be heavily in bonds and you use stocks effectively to get a little extra return as your inflation hedge. That's what people, you know, did before things before. And the quaint old days of normal interest rates. And the quaint old days before, and it actually started in the, in the dot com bust era, I mean, even though we see it worse under yelling and, you know, the Bernanke's yelling area, it really started in the green span era in the wake of the dot com era, where he drove rates again to what they call negative real interest rates or interest rates were below the rate of inflation, which again forced investments into all kinds of risky assets. So, we've been running this movie for a long time. It's just we've gotten into the sort of gory or more graphic, you know, scenes more recently 3d Gore.

If I want to mention the listeners that the aforementioned board meetings, if you really want to see this stuff in action are in many cases on your website. Right. Accepted and and and in whole in some cases, which is naked capitalism got dot com, where you continue to report on this story with great evidity and with great persistence. As always, thank you so much for being with me. Thank you, Harry. It was a real pleasure. That's going to conclude this week's edition of the show. The program returns next week at the same time over these same stations over NPR worldwide throughout Europe. You're up the use in 440 cables in Japan or on the world through the facilities, the American forces network up and down the east coast of North America by the shortwave giant WBC Q on the mighty 104 in Berlin on Soho Radio in London available as a thing for your smartphone through stitcher dot com. It available as a podcast thing from iTunes sound cloud side show network tune in dot com and WWNO dot org.

And it would be just like knowing what's going on with private equity, even a little bit more. Maybe if you agree to join with me then would you already thank you very much. Uh huh. Tip it to the show. Shout out to the San Diego Pittsburgh Chicago and eggs out on the Hawaii desk. Thanks as always to Pam Haustead to Jenny lost in the WWNO and Paul Roost at Argo Studios in New York for help with today's broadcast. And me, thank you for asking. I'm on the Twitter at the Harry Shira. The show comes to you from century of progress productions and originates to the facilities of WWNO New Orleans flagship station for the changes easy radio network. So long.