In 2002 we gave a speech at the annual Florida Police and Firefighters Pension Trustee Educational Seminar entitled, "The Best Investment Advice: Fundamental Truths about the Business of Managing Your Money." In the speech we warned Florida public pension trustees that brokers employed by the major firms as investment consultants were subject to conflicts of interest and were engaged in pay-to-play schemes whereby money managers were recommended based upon willingness to pay versus investment merits. Many of the trustees we met boasted of the low fees their funds paid their investment consultants for supposedly objective investment advice regarding asset allocation and manager selection. Some trustees even said they were getting investment consulting services "for free." In response to which we made the following outrageous, better offer: "We will pay you $1 million to be your pension consultant." We then went on to explain that we could offer to pay them this sum because, by virtue of serving as the gatekeeper to their funds, we could earn far more than $1 million in brokerage kickbacks from their money managers.
In the months after the speech we were contacted by single trustees from various pension boards who were concerned about their investment consultants. The pension fund performance reports we reviewed all showed the same ugly results: horrendous underperformance and extensive self-dealing involving consultants.
In October 2004 we published an article on our website entitled "Shame and Scandal in Florida Public Pension Community" wherein we noted, "Public pensions throughout Florida are being defrauded by brokers registered with Wall Street powerhouses who hold themselves out as pension experts. Over the past year we have met with trustees of many of these funds advising them of our preliminary findings, as well as reviewing investment performance reports prepared by their broker- consultants. The performance of these funds is generally dismal. We have seen reported performance in the bottom 5%; other more fortunate funds are simply in the bottom third or half. In addition to questionable performance figures, the consultant reports we have reviewed are seriously deficient. We have provided letters to board members indicating that, in our opinion, these funds may have been harmed by the arrangements they have with their broker-consultants. Remarkably the trustees who are fiduciaries to these funds have generally resisted undertaking investigations, choosing instead to rely upon reassurances provided by the consultants themselves...Given the prevalence of broker- consultants in the Florida public pension community, the cost of the corrupt advice they provide is costing the State's taxpayers plenty-hundreds of millions annually."
Board members, mayors, labor lawyers employed by the funds, independent consultants and others met with us regarding consultant abuses in cities such as Hallandale Beach and Sunrise. While one or more trustee at a given fund might have concerns, still the Boards did not want to acknowledge the problem. The labor lawyers they had retainer agreements with ventured far from their area of legal expertise to offer opinions regarding the propriety of investment consultant conduct.
Time passed, more money was lost and statutes of limitations continued to run on the huge losses related to the 2000-2001 dot com meltdown.
The question we were asked time and again was, "If there's wrongdoing, why isn't the SEC doing something about it?" In other words, until the SEC acted and essentially told the boards they had a duty to investigate, they were not going to do anything.
Dow Jones over the course of two years ran two or three stories about Florida public pension trustees beginning to ask questions regarding their consultants. The New York Times ran an article in December 2004 discussing the Florida public pension consultant problem and, rather than prompt action, the article resulted in some angry mayors. The Lake Worth Forum in December 2004 published an article entitled, "Municipal Pension Funds Allegedly Mismanaged," and Boynton Times in the same month ran an article, "Investigator Warns City of Pension Pitfalls," both articles quoting us. This resulted in more angry mayors but again no action.
Finally, we were hired in February 2005 by the Delray Beach Police and Firefighters pension fund to investigate its broker-consultant. Our findings of conflicts of interest and undisclosed compensation were widely published in the national pension press, as well as local newspapers. While the fund's relationship with the consultant was terminated some time later, the matter remains unresolved to this date. Over the course of time, since the findings of the investigation became public, other Florida public funds expressed interest in the findings and outcome but none followed suit by instituting their own investigations.
September 2005 Money Management Letter wrote an article about how Florida regulators were looking into brokers serving as consultants to public pensions. December 2, 2005 the New York Times ran an article entitled, "Merrill Unit Subpoenaed on Pensions." Now trustees, instead of asking why if there was wrongdoing, hadn't the SEC taken action, said they would wait to investigate until the SEC announced its findings. Unfortunately, as we tried to explain to these trustees, the SEC investigation was already 5 years overdue and statutes of limitations were running on losses related to the 2000-2001 meltdown. Further, there could be no assurance the SEC would release its findings in the near term and, even if the Commission did, those findings would not answer the ultimate question of the amounts of the funds' damages related to these consultant conflicts of interest.
More time passed.
What was the Florida Public Pension Trustees Association, a non-profit supposedly committed to educating Florida public pension fund trustees doing to raise awareness of these serious issues? The broker-consultants and the money managers they recommended that paid substantial fees to underwrite these supposedly "educational" conferences continued to speak as experts, even as they were under investigation. While the broker consultants spoke at these junkets, we were told by several of the organization's members that recommended including us on the educational program that they were told we were not welcome to speak. Our comments were not welcome because they would be "polarizing." Imagine that: telling the truth can be polarizing! So, even the Florida public pension trustee association's educational program was impacted by potential conflicts of interest that were not openly discussed. In our opinion, broker- consultant (and money managers in their "daisy chain") sponsorship had undermined the integrity of the organization's educational process.
Then something really weird happened. Merrill Lynch brought in an out-of-state hired gun, Richard Robbins, an attorney from the Atlanta office of Sutherland Asbill & Brennan, to argue against our offers to investigate conflicts of interest involving brokers such as Merrill and attack us. In Lake Worth, South Miami and Boynton Beach Robbins told public fund trustees that they had no fiduciary duty to investigate the potential conflicts of interest we described. He accused us of trying to scare trustees into believing they had such a duty. It was outrageous: the party to be investigated was invited to participate in the discussion of whether it should be investigated. Robbins stumbled when he misrepresented to the Boynton Beach trustees that our investigation in Delray Beach, Florida had been "shut down." Despite the fund's dismal performance, no forensic investigation was undertaken in Boynton Beach. The Siedle-Robbins debate is available on audio CD from the City of Boynton Beach and is fascinating. We encourage our readers to request a copy of it. Also included in the audio is the Merrill Lynch consultant's report to the Board regarding the fund's (under) performance.
Then the Wall Street Journal reported on March 12, 2007 that Merrill Lynch had begun issuing refunds to public pension clients in Florida. Florida public pensions apparently took the money, no questions asked.
This past week, Merrill Lynch sent letters, such as the one below to their Florida public pension clients. The letters stated that the SEC believes Merrill did not provide relevant information about fees, manager selection and conflicts of interest. Of course, these are the very issues we have urged Florida public pensions to investigate since 2002.
On Sunday, November 4, 2007, the New York Times ran an article regarding the SEC investigation of Merrill and the letters the firm had sent to clients. On Monday, November 5, 2007, the Board of the Jacksonville Police & Fire Pension System voted to terminate its relationship with Merrill.
We estimate that approximately $1 billion has been lost by Florida public pensions as a result of broker- consultant schemes. Tragically Florida taxpayers have had to contribute more to fund these underperforming retirement plans for state workers. Florida public pensions have suffered for decades as their broker-consultants profited. There is plenty of blame to go around because it was in no one's interest to expose the wrongdoing. A clean-up is long overdue. Let's hope that the winds of truth have finally begun to blow into the sheltered world of the Florida public pension community.
Statement of the Jacksonville Police and Fire Pension Board of Trustees Regarding the Relationship with Merrill Lynch Consulting Services
The Jacksonville Police and Fire Pension Board of Trustees (Board) retained Merrill Lynch Consulting Services (MLCS) to provide independent fiduciary guidance to the Board on issues relating to Investment Manager Performance Measurement; review of and updating the Fund Asset Allocation Plan; Fund Investment Policy and other related investment related monitoring services needed by the Board. For over 20 years MLCS provided the required services to the Board.
Chapter 175.061(6)(a) and 185.06(5)(a) require the Pension Board to "retain a professionally qualified independent consultant who shall evaluate the performance of an existing professional money manager".
Nearly two years ago, the Board was made aware in published reports of the Securities and Exchange Commission (SEC) staff investigation into certain specific business practices of Merrill Lynch Consulting Services and also those of Mr. Michael Callaway (the Consultant), a representative of Merrill Lynch Consulting Services who has a fiduciary relationship with the Board as the Investment Performance Measurement Consultant to the Board. The Staff of the Board has cooperated fully with the SEC staff during the investigation.
On October 29, 2007, the Board was informed by MLCS "the SEC staff has indicated that it believes that some practices engaged in by Merrill Lynch and Mike Callaway violate certain regulatory prohibitions". Also, on October 29, 2007, we were informed by the Consultant the SEC "has taken issue with some of Merrill Lynch's and my practices." The Board has no detailed knowledge of the particular practices the SEC staff believes to violate regulatory prohibitions, nor does the Board by its actions today express a vew of the SEC staff recommendations.
In special session, on November 5, 2007, the Board voted to terminate the Agreement for Investment Evaluation and Consultant Services with MLCS and the Consultant, effective December 31, 2007.
Fair Game: A Ray of Pension Sunshine
By GRETCHEN MORGENSON
The New York Times
BUSINESS | November 4, 2007
Increased scrutiny on the costly effects that middlemen can
have on pensions will surely help investors and pension
SEC probes Merrill adviser
By JEFF OSTROWSKI Palm Beach Post Staff Writer
Friday, November 02, 2007