(December 6, 2005) Why the PBGC Can’t Afford Free Forensic Audits
Date: Monday, July 13 @ 21:35:22 CDT
Topic: Money Matters

As detailed in the September 28, 2005 letter below to Bradley Belt of the Pension Benefit Guarantee Corporation, we met with Mr. Belt and senior staff of the PBGC on September 7, 2005 and offered to conduct forensic reviews for the PBGC of failed pensions for which the PBGC has assumed responsibility. Our reviews would focus upon conflicts of interest, hidden financial arrangements and malfeasance, involving firms that have provided investment services to failed pensions. As we learned during our meeting, while the PBGC has taken over more than 3,500 plans, the agency has never undertaken a forensic review of any of these plans. Indeed, Belt has publicly stated that while there are similarities between the federal savings and loan bailout and the pension bailout, one notable difference is the lack of fraud or mismanagement in the pension arena.

As we have previously written, we believe, based upon
hundreds of investigations, that pension fraud and
mismanagement is pervasive; the PBGC simply lacks an
understanding of what constitutes fraud and mismanagement
in the pension context and is not looking for it. We
offered to conduct these forensic reviews for free, i.e.,
on a contingency basis.

As reported below in a Pensions & Investments article dated
September 29, 2005, the PBGC rejected our free
investigations offer, claiming that the agency could not
afford the expense. This response is, of course,
preposterous. With thousands of corporations abandoning
their obligations to provide for the retirement security of
millions of American, one would think the PBGC would be
motivated to investigate whether wrongdoing by investment
firms contributed to the demise of some of these failed
pensions. Further, any recoveries related to wrongdoing
would not only potentially inure to the benefit of
participants in failed plans and reduce the premiums PBGC
charges healthy corporate sponsors, such recoveries would
also discourage investment firms from failing to adhere to
the highest fiduciary standards in their dealings with

Two members of the House of Representatives found the
PBGC’s response to forensic audits unacceptable and asked
the Government Accountability Office to investigate whether
the federal agencies (such as the PBGC) that enforce
pension law have failed to police the consultants and money
managers to pensions. The letter by Representatives Miller
and Markey dated November 30, 2005 is presented below.

Why can’t the PBGC afford free forensic audits? The answer
is simple. While the PBGC publicly states its mission is to
ensure that corporations sponsoring defined benefit
pensions are prepared to honor their obligations to
workers, its private agenda is to assist corporations in
abandoning their pension obligations. The Administration’s
belief is that if American corporations are to compete
globally in the future, they must be freed from the
promises they have made to their employees over the past 50
years or so. Unfortunately, several generations of America
workers will be largely stripped of their retirement
security if this effort is successful. Furthermore, the
past 50 years of prosperity American businesses have
enjoyed would have been impossible without the hard work of
millions who are relying upon these corporate pensions.

Mandatory forensic audits of failed pensions will not
expedite the wholesale abandonment of the nation’s defined
benefit pensions. Uncovering malfeasance, assigning blame
and recovering from wrongdoers is an ugly business and
takes time.

Based upon our experience, we can assure you we will
uncover wrongdoing by corporate sponsors and firms
providing services to many failed pensions. That is what
the PBGC cannot afford.

Bradley Belt
Executive Director
Pension Benefit Guaranty Corporation
1200 K Street, N.W.
Washington, D.C. 20005

September 28, 2005

Re: Forensic Reviews of Failed Pensions

Dear Mr. Belt,

Thank you for the invitation to meet with you and the
senior staff of the PBGC, including James Gerber, Judith
Starr, Jeffrey Cohen, Vince Snowbarger and Terrence Deneen,
on September 7, 2005.

As I mentioned at the outset of our meeting, I have been
writing and speaking about, as well as investigating,
conflicts of interest, hidden financial arrangements and
wrongdoing involving investment consultants, money managers
and other vendors providing investment services to pensions
since the early 1980s. As a leading authority on pension
investment management issues, I have repeatedly
demonstrated through investigations I have undertaken that
wrongdoing by vendors to pensions is commonplace; assets
are indeed being skimmed from the nation’s pensions.

As a result of the above investigative initiatives, in 2003
I was asked to testify before the Banking Committee of the
U.S. Senate on the mutual fund scandals and in 2005 before
the Retirement Committee of the Louisiana House of
Representatives regarding the nation’s first pension
consultant disclosure law.

Also in 2003, the staff of the Securities and Exchange
Commission asked me to provide information and guidance in
connection with a staff investigation into the pension
consulting industry. My firm provided the staff with a road
map for its inquiry, as well as the findings of certain
specific investigations of investment consultants we had

As you know, the Commission staff gathered significant
information regarding the divergent (and conflicting)
sources of revenues these gatekeepers to the nation’s
pensions derive from the money managers they are charged
with vetting, as well as from pensions. At this point in
time, the staff of the Commission has more information
regarding the underlying economic realities of the pension
consulting business than anyone, including any pension

It should be abundantly clear from the data that the
Commission has gathered (which should be available to your
agency) that the revenues the consulting industry derives
from money managers are exponentially greater than those
derived from providing objective advice regarding these
same money managers to pensions. Our investigations have
revealed that a corrupt consultant can earn ten times more
in kick-backs from money managers than he earns from
advising pensions. These economic realities explain the
current state of corruption of the consulting industry.

The Commission staff concluded in a May 16, 2005 report it
issued to the public that conflicts of interest were
pervasive and disclosure was abysmal in the pension
consulting industry. Specifically, the Commission staff
found that “[P]ension consultants may steer clients to hire
certain money managers and other vendors based on the
pension consultant’s (or affiliate’s) other business
relationships and receipt of fees from these firms, rather
than because the money manager is best-suited to the
clients’ needs. Such a conflict can compromise the
fiduciary duty that investment advisers owe their clients.”
(emphasis added) (SEC Staff Report Concerning Examinations
of Select Pension Consultants, May 16, 2005, Page 3).

On June 1, 2005 the Commission staff and the Department of
Labor issued a “checklist” of questions for plan sponsors
to ask of their investment consultants. The questions on
the checklist related to disclosure of conflicts.

What the Commission’s report did not say in its report was
whether pensions are actually harmed by these hidden
conflicts. In our investigations (which are the only such
investigations that have been undertaken) we have found
that consultant conflicts can cost a fund 10-15% over time.
The harm to pensions is substantial and quantifiable.

During my meeting with you and your staff, the following
question was asked of me several times: “What do we care if
there are hidden financial dealings between investment
consultants and money managers to pensions,
i.e.,“kick-backs,” if fund performance does not suffer?” In
response I stated that in my professional experience there
are no harmless kick-backs. Performance always suffers
whenever “pay-to-play” determines which managers are hired.
However, unless an investigation aimed at ferreting out
all hidden financial arrangements is undertaken, we cannot
connect the dots to establish harm to the fund. Belief that
hidden financial arrangements have no impact upon
performance without an adequate factual inquiry is, in my
opinion, irresponsible.

Further, even if there were harmless kick-backs, the law is
quite clear that they belong to the fund, not the corrupt
advisers. But a thorough investigation is required to
identify and quantify even the kick-backs.

As I opined during our meeting, in response to your
question concerning the advisability of conducting forensic
reviews of all 3,500 funds taken over by the PBGC, I
believe a review of every failed fund is merited for
several reasons. Uncovering wrongdoing will improve the
morality of the marketplace and aid regulators and law
enforcement in recovering from, as well as punishing, the
wrongdoers. Finally, fiscal responsibility demands that a
review be undertaken prior to a bailout. If you disagree
with these conclusions, I encourage you to share with me a
justification for refusing to investigate possible pension

I would welcome the opportunity to provide an analysis of
which of the 3,500 plans should be examined immediately,
based upon my knowledge of the business practices of the
vendors to these funds and other factors. I believe we
could identify approximately 500 plans that merit immediate
attention. Given the widespread use of investment
consultants by pensions and the pervasiveness of conflicts
in the industry, I believe that the majority of the plans
the PBGC has taken over may be entitled to recoveries.

In response to your concern that such forensic
investigations may amount to “fishing expeditions,” let me
remind you that both the Commission staff and the
Department of Labor have determined that conflicts of
interest are pervasive in the consulting industry and not
adequately disclosed. These agencies recently advised all
plan sponsors to investigate these conflicts. Thus,
forensic investigations aimed at ferreting out conflicts of
interest, hidden financial arrangements and wrongdoing, are
not fishing expeditions; rather, they are required “good
housekeeping” for all pensions.

Furthermore, with respect to certain failed pensions, such
as those sponsored by United Airlines, we already know that
the investment consultant of all the funds also served as
an investment manager to at least one of the funds. In
other words, an obvious conflict of interest is apparent
before we even begin our inquiry.

I believe you already know or can easily determine whether
the consultant to that failed plan fully disclosed, i.e.,
specifically identified and quantified, all the conflicting
sources of its revenues. Unless the consultant, at a
minimum, fully disclosed the nature and amounts of the
conflicts related to its advice, a forensic review is
mandatory. In my experience, no conflicted consultant ever
fully discloses all the monies he derives from serving as a
gatekeeper to pensions because, if he did so, clients would

The investigations or audits that your staff indicated it
undertakes in connection with terminated plans, I believe
we agreed are not forensic audits focused upon conflicts of
interest, hidden financial arrangements and wrongdoing.
However, if your staff is confident (based upon its review)
that the consultant to the United Airlines plans fully
disclosed its conflicts and no harm to the funds resulted
related to these conflicts, please so advise me.

As I also stated at our meeting (in response to a statement
made by a member of your staff), it is virtually
inconceivable to me that none of the money managers the
PBGC has hired to manage assets have engaged in conduct
that resulted in harm to a failed pension, given the degree
of collusion between that exists today between money
managers and investment consultants.

I recall that in connection with the savings and loan
bailout in the 1980s, firms that had caused a loss to a
failed institution were prohibited from contracting with
the Resolution Trust Corporation. I believe it is
appropriate that the PBGC consider whether the firms with
which it contracts for asset management services have
engaged in pension wrongdoing. If they have contributed to
the demise of a failed pension, these firms should be
precluded from contracting with the PBGC. Of course,
without forensic investigations focused upon such
wrongdoing, you cannot be certain which firms have
integrity and which should not be trusted.

As to the question asked aloud by your staff at the meeting
regarding how any recovery we obtain might be allocated, I
do not believe consideration of this issue should delay
action regarding wrongdoing. Clearly any sums recovered
will inure to the benefit of either plan participants or
plan sponsors or the PBGC itself or some combination of the

With respect to the “cost-benefit analysis” you referred to
at our meeting, let me restate that we would be prepared to
undertake these forensic investigations under the
appropriate circumstances at no cost, i.e., on a
contingency basis. Thus, there is no cost absent a benefit.

Finally, while the Department of Labor should have
investigated and taken enforcement action against
investment consultants that engaged in wrongdoing, the
agency has clearly missed its opportunity to do so at least
with respect to the 3,500 plans your agency has already
taken over. Since your agency is now responsible for these
plans, at this time it seems that only the PBGC can
initiate forensic reviews of these plans.

I look forward to hearing from you regarding our proposal
to conduct forensic reviews of failed pensions. Please call
me at (561) 202-0919 if you have any questions or comments.

Very Truly Yours,

Edward Siedle

Via Email
Bradley Belt
Executive Director
Pension Benefit Guaranty Corporation
1200 K Street, N.W.
Washington, D.C. 20005

October 17, 2005

Re: Forensic Review of the PBGC’s Investment Consultants
and Managers

Dear Mr. Belt,

At my September 7, 2005 meeting with you and the senior
staff of the PBGC, including James Gerber, Judith Starr,
Jeffrey Cohen, Vince Snowbarger and Terrence Deneen, we
discussed the issue of whether any of the investment
consulting or money management firms contracting with the
PBGC may be subject to conflicts of interest that should be

According to Nelson Information’s Directory of Plan
Sponsors, Wilshire Associates serves as a full retainer
consultant to the PBGC. As you may recall, Wilshire is also
the investment consultant to the Northwest Airlines pension
that we discussed.

Recently a Wilshire spokeswoman was widely quoted as
stating Wilshire was part of the SEC’s investigation into
the investment consulting industry and that the SEC
recommended changes to Wilshire’s disclosure policies.

Since your agency serves as the trustee for the assets of
3500 terminated plans, you may wish to consider a thorough
review of the conflicts of interest to which Wilshire may
be subject; financial arrangements Wilshire may have with
money managers; the firm’s disclosure practices and related
matters. We would welcome the opportunity to conduct such a
forensic review on the behalf of the PBGC.

As always, I look forward to hearing from you.

Ted Siedle

PBGC declines offer on forensic audits Pensions &
September 29, 2005

Benchmark Financial Services today offered to perform
forensic audits of pension plans taken over by the PBGC to
look for any undisclosed conflicts of interests or other
improper activity by consultants and money managers and to
help seek potential recovery of any losses or fees stemming
from any uncovered misdeeds.

In a letter sent today to Bradley Belt, PBGC executive
director, Edward A.H. Siedle, Benchmark president, said: “I
would welcome the opportunity to provide an analysis of
which of the 3,500 plans should be examined immediately,
based upon my knowledge of the business practices of the
vendors to these funds and other factors. I believe we
could identify approximately 500 plans that merit immediate
attention. Given the widespread use of investment
consultants by pensions and the pervasiveness of conflicts
in the industry, I believe that the majority of the plans
the PBGC has taken over may be entitled to recoveries.
…Unless the consultant, at a minimum, fully disclosed the
nature and amounts of the conflicts related to its advice,
a forensic review is mandatory.”

In response to the letter, a PBGC spokesman, said: “The
PBGC invited Mr. Siedle to share with the agency whether he
had any specific evidence that terminated pension plans
were the victim of wrongdoing. Mr. Siedle was unable to
furnish such evidence but did offer his services to the
agency on a contingency-fee basis. The PBGC's principal
concern is whether plan participants or the insurance fund
have suffered financial losses as a result of illegal
activity. The PBGC must have a reasonable basis for
believing such activity has occurred before it can consider
the expenditure of premium dollars."

The spokesman said PBGC officials would have no further
comment on the letter.

Lawmakers Seek Inquiry on Pensions

The New York Times
Published: December 1, 2005
Correction Appended

Two members of the House of Representatives asked the
research arm of Congress yesterday to investigate whether
the federal agencies that enforce pension law have failed
to police a crucial part of the pension business: the
consultants and money managers who help decide how money is

The request by Representatives George Miller, a California
Democrat, and Edward J. Markey, Democrat of Massachusetts,
underscores a flaw in the pension law.

The law divides the authority for pension plans among three
federal agencies, which look at such issues as whether
companies are putting enough money into pension funds and
whether they are keeping employees informed about the
plans. But the money managers are regulated by a fourth
agency, the Securities and Exchange Commission, which has
no authority over pension law.

This regulatory problem is as old as the pension law, 31
years. But it has become apparent only recently, as a
series of record-size corporate pension failures has put
new burdens on the federal agency that insures pensions.
Even now, with Congress trying to close loopholes in the
pension law, the focus has been on how to make sure
companies put enough money into their pension funds, not
how the money is invested after that.

In a letter to David M. Walker, the head of the Government
Accountability Office, Congress's investigative arm, the
congressmen pointed to the collapse this year of the
employee pension plans at United Airlines.

They noted that a union that represents some United
employees, the Aircraft Mechanics Fraternal Association,
had specifically asked federal regulators to look into
whether United's pension consultant had been acting solely
in the interests of the plan participants, as the law
requires, or had been steering blocks of pension money to
certain money managers for business reasons.

The union put its request last summer to the Pension
Benefit Guaranty Corporation, which guarantees company
pensions, and to the labor secretary, Elaine L. Chao, who
is chairwoman of the guaranty corporation.

"We understand that the P.B.G.C. has to date declined to
undertake a forensic audit of United's plan to ascertain
whether there were, in fact, conflicts of interest, hidden
financial arrangements and unlawful activities," the
representatives wrote.

They said this was particularly disturbing because United's
pension failure came at about the same time as the S.E.C.
issued a critical report on the pension consulting

The report, based on an 18-month review, found that more
than half the pension consultants in the S.E.C.'s sample
were being paid by money management firms, even as they
claimed to be screening and selecting money managers
objectively on behalf of their pension fund clients.

The S.E.C. referred about a dozen of the consultants to its
enforcement division for further action, but it did not
name them.

The two representatives said the S.E.C. report raised
questions about whether conflicts of interest among
United's consultants and its money managers had contributed
to the failure of its pension fund. That failure caused
record losses of about $10 billion, which will be borne by
the Pension Benefit Guaranty Corporation and the employees
of United.

Not only had the guaranty corporation not made a review of
United's consultants and money managers, they wrote, but
"we are not aware of any plans by the P.B.G.C. to
systematically assess whether pension consultant conflicts
of interest or undisclosed financial relationships existed
at any of the terminated plans now under its control."

The representatives said they had been asking the S.E.C.
whether any of the pension consultants referred to the
commission's enforcement division were used by United's
pension fund, but so far they had not received an answer.
They also asked the Government Accountability Office to
determine whether the pension agency had used any of those

A spokesman for the accountability office confirmed that it
had received the request for an investigation and would
work with the lawmakers on defining the scope and timing of
an investigation.

The pension guaranty corporation has taken over nearly
4,000 defunct pension plans in the last three years,
digging itself into a $23 billion hole. The guarantor is
not at risk of running out of money anytime soon, but
Congress has been working on legislation that would improve
its finances as well as close the loopholes in the rules
that govern how much money companies set aside for their
pension plans. But progress has been slow.

The pension law requires the officials of company pension
plans to make sure the money is invested with "care, skill,
prudence and diligence." In practice, many plan sponsors
work with outside consultants, who help them devise an
asset-allocation strategy and pick outside money managers
to carry it out.

This division of labor appears to be causing confusion
about which regulatory agency should monitor the investment
of pension money.

Correction: Dec. 2, 2005, Friday:

An article in Business Day yesterday about a request by two
members of the House of Representatives for an
investigation into the way pension fund investments are
regulated misstated the number of pension plans taken over
by the Pension Benefit Guaranty Corporation in the last
three years. It is 413 plans, not nearly 4,000.

This article comes from Pension fraud Investigations, money management abuse

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