Grand Jury Subpoena Regarding Fiduciary Investment Solutions et al.
On August 11, 2005, we received a subpoena to testify before a Grand Jury of the United States District Court for the Eastern District of Pennsylvania. The subpoena requested information related to any investigation(s) we have conducted regarding Fiduciary Investment Solutions (FIS); FIS Alternative Investment Strategies (AIS); FIS- Funds Management Inc.; Tina Poitevien; and Orim Graves. Since then, we have met with agents of the Federal Bureau of Investigation at our offices and have assisted that agency, as well as the Assistant United States Attorney for the Eastern District of Pennsylvania, in their criminal investigation. We will continue to be responsive to the needs of law enforcement in this matter.
Murders and Pensions: The Need for Forensic Investigations
Speech by Edward Siedle to the Western Pension & Benefits Conference
I would like to start by telling you a story. Travel back in time with me some thirty five years ago to a far, distant country.
The year was 1971. The country was Uganda in East Africa. Two Americas had disappeared in a remote town out in what was referred to as “the bush.” The two men had been investigating rumors of a massacre involving hundreds of soldiers in the Ugandan Army. The massacre had been committed at the Simba Battalion barracks in the garrison town of Mbarara.
“Simba” means lion in Swahili and at each side of the barracks gate was a cement statute of a lion sitting on its haunches. To the left of the gate stood a building, what is referred to in military language as the “quarter guard.” It was a place where prisoners were kept, generally unruly soldiers. A picture of a ghostly lion was painted on the cement wall in shades of gray and white.
In July, 1971, the new President of Uganda had an international public relations nightmare on his hands. One of the American men who had disappeared in Mbarara was a Reuters newspaper reporter and the U.S. government, as well as the world press, wanted answers. Newsweek magazine published an article within days raising questions as to the circumstances surrounding the disappearances.
There was a tremendous sense of urgency for all involved because in Africa of the many who disappear in the bush, few ever return. If the two men were still alive, they had to be found quickly. With each passing day the likelihood they had met an untimely death grew. The Ugandan Government maintained the men were not dead but had left the country.
The President of Uganda appointed a well-respected judge of the High Court of Uganda to head a Commission of Inquiry to conduct and independent investigation into the disappearance of the two men. Justice David Jefferys Jones was charged with the awesome task of investigating, in a politically charged atmosphere, whether any of the branches of government, including the military and executive branches, were involved in the disappearances.
Justice Jones would later comment, in his final report of the Commission’s findings that “Never has any inquiry been beset with such obstructions and confrontations as this.” The Judge was provided with no investigators to assist him, the military consistently refused to cooperate and the President regularly sought to influence the tribunal.
The crucial break in the case came when the car the two Americans were last seen driving was finally found. The judge had to personally enlist the assistance of a group of schoolboys, members of a local mountain climbing club, to accompany him to a deeply wooded valley and descend into a ravine infested with black snakes and populated by lion, leopard, baboons and elephants. There, the searchers found the burnt out body of the Volkswagen car driven by the two missing Americans. A witness to the murders, an Army deserter who had fled to Tanzania, had sent a letter to the tribunal telling how the Americans had been murdered and that he had been ordered to destroy the bodies and the car. And the remains of the car were where he said they would be.
From this powerful circumstantial evidence the Judge ultimately concluded the two American men had met their deaths at the hands of the Ugandan Army, even though their bodies were never found.
As I mentioned earlier, the President was never comfortable with the proceedings of the Commission of Inquiry and throughout sought to interfere with the investigation. The very day Justice Jones found the burnt out car, before his findings had been announced to the public, the President had expressed anger at the Judge for his grilling questioning of Army officers before the Commission of Inquiry.
Justice Jones sharply replied to the President’s criticisms, “Do you really want an answer to the questions posed in the Inquiry?” The President was silent. “Well, you are going to get one,” Jones said sternly.
In the end the Judge learned the President had been at the barracks when the Americans were murdered. He had personally ordered the killings and he believed he was above the law. Chief Justice Jones fled Uganda hidden in the truck of the American ambassador’s limousine as it crossed the border into neighboring Kenya.
With him went the “rule of law” from Uganda. Uganda then descended into a madness that lasted for over a decade and resulted in the killing of close to a million of its citizens.
The President of Uganda was General Idi Amin Dada, a man whose name is today synonymous with evil.
One of the two Americans who disappeared in Mbarara in 1971, whose body was never found, was my father, Robert Louis Siedle.
Seared into my memory are the words of the courageous Judge Jones, a man committed to justice, who said to Idi Amin, the brutal dictator of Uganda, putting his own life in jeopardy, “Do you really want an answer to your questions? Well, you’re going to get one.”
Now, let me turn to our subject today.
Why should we conduct forensic investigations of pensions? What are we looking for? What do we routinely find? What’s at stake? These are the questions I hope to answer.
Why should you consider a forensic audit or fiduciary review of your plan?
Put simply, “Do you really want to know, do you really want an answer to the question of whether your plan is being harmed or defrauded?
The law is quite clear: Firms providing investment services and professional advice to pensions are fiduciaries. Fiduciaries are required to (1) always act in the best interests of their clients; (2) place the best interests of their clients before their own; (3) disclose any conflicts of interest; and (4) disclose all compensation they receive.
Unfortunately, companies seek to maximize profits, not to do what’s necessarily best for their clients, pensions. Companies seek to maximize returns to their shareholders. If they do not, they risk being sued by shareholders. Doing what’s best for pension clients rarely, in the short term, is best for profits. Further, it is human nature for individuals to seek to maximize their personal gains.
The result is that few of the companies that provide critical services to pensions, involving high degrees of trust and confidence, operate in a manner consistent with their fiduciary duty. In brief, “Your trusted financial advisers are not to be trusted.” At least not always.
Given these realities it is imperative that pensions regularly undertake reviews aimed at uncovering wrongdoing.
How often should reviews be undertaken?
We believe that pensions should undertake comprehensive reviews every five years at a minimum, as well as targeted reviews whenever specific concerns arise.
Recently I spoke at a pension conference following Frank Abignale, the former con artist whose life was the subject of the film “Catch Me If You Can.” Frank described how he had been able to steal millions from companies that lacked procedures to detect and prevent fraud.
That’s what we’re talking about today:
Establishing systems for pensions to detect and prevent fraud.
I once told a pension client, “I could steal millions from you and you’d never know it happened.” That was disconcerting for the client to hear but it was the truth. In fact, we later learned the client had lost tens of millions as a result of a scam he was utterly unaware of.
What are we looking for in our investigations?
We are looking for (1) conflicts of interest; (2) hidden financial dealings; (3) fraud and other forms of wrongdoing. These are NOT matters reviewed by accounting firms in their audits. In fact, audit firms would be subject to conflicts of interest in accepting such an assignment since they have already opined as to the accuracy of the financial statements.
Do conflicts, hidden financial dealings and wrongdoing exist within pensions?
Since 1983 I have been investigating wrongdoing involving money managers. Since 1995 I have been writing about wrongdoing within pensions. Until recently the industry hardly bothered to dispute my accusations. The reputation of the industry was unblemished and allegations of wrongdoing were considered preposterous. Times have changed.
In late 2003 the SEC asked my firm for guidance in investigating the pension consulting industry. This was the SEC’s first foray into the pension world. Pension consultants, as you know, are important advisers to pensions and exert tremendous influence because they recommend the money managers funds hire.
On May 15, 2005 the SEC announced the findings of its staff study of conflicts of interest in pension consulting. The SEC found conflicts pervasive and disclosure abysmal. Soon thereafter the DOL released a checklist of questions pensions should ask of their consultants. In short, these two agencies, the SEC and DOL, have confirmed the problems are real. Pension conflicts do exist and do put pensions at risk.
Many pension trustees and their legal counsels have said to me in the past: If these problems really exist, why hasn’t the SEC done something? Well, now the SEC and the DOL have confirmed there are real problems. Let me tell you what’s going on in Washington in this area.
Would you believe the PBGC has taken over 4,000 failed pensions and never once conducted a forensic investigation? It’s true. When the savings and loans failed in the 1980s, the government looked for wrongdoing in connection with the bailout of the industry. For some reason, when S&Ls fail, we look for wrongdoing but when pensions fail, it’s no one’s fault—ever.
When we met with senior staff of the PBGC recently, the head of the PBGC said to me, “What do we care if there are kick-backs as long as performance doesn’t suffer?” My response was “There are no harmless kick-backs and even if there were, the law says the improper payments rightfully belong to the participants, not the corrupt adviser.”
Well, he’s no longer the head of the PBGC and I hope whomever replaces him has the knowledge and wisdom seek solutions to the nation’s pension crisis. The GAO just last month agreed to conduct an investigation into pension conflicts, including why the DOL and PBGC have not scrutinized failed plans and continue to fail to do so. The issue is not going away.
On the national level, as more plans fail, the demand for investigations will grow.
So where are we today? As Ghandi once said, "First they ignore you, then they laugh at you, then they attack you, then you win."
My assessment of the current status is that the industry isn’t ignoring or laughing at our message anymore, they’re in an attack mode. We’re in an escalating battle where every instance of successfully exposing malfeasance weakens the industry’s illusion of respectability. The public is beginning to realize that there may indeed be blame to assign when pensions falter or fail. Just like Enron or Worldcom, it took a lot of experts, financial, legal and others, to bring about these spectacular collapses.
For the industry it is critical to oppose the move toward forensic investigations, for any reason imaginable. They’ve got to. The industry knows there is a lot of wrongdoing still to be uncovered.
Let me give you examples of conflicts of interest, hidden financial dealings, wrongdoing we’ve uncovered. Pension consultants: Pay-to-play schemes where the objectivity of the advice the consultant is providing regarding asset allocation, money manager selection and brokerage is corrupted as a result of secret compensation schemes. The best managers are not selected, performance suffers, commissions and money management fees are excessive.
We’ve seen corrupt pension consultants who pensions thought were getting paid a set fee, say $100,000, earn over a million in kick-backs. One consultant was making $8 million a year. That’s why I offered a pension trustee audience 5 years ago to pay them $1 million to be their consultant. I explained to them I was willing to make the million dollar offer because I could reap multiples of that amount in kick-backs from their money managers. Money managers: Misrepresentations regarding assets under management, performance, investment process, credentials, undisclosed financial relationships with consultants. Hedge funds are especially problematic.
We’ve seen money managers with no assets under management claim to manage billions.
Brokers: Influence peddling due to relationships with Board members; hidden solicitation agreements with money managers; excessive commission costs; soft dollar and directed brokerage arrangements that pose conflicts and are not fully disclosed.
We just completed a “best execution” analysis for a pension which showed the pension was paying ten times the brokerage costs it should have. Wherever you have “captive” brokerage, that is brokerage directed to a single firm, the need for that brokerage firm to be competitive may go out the window. “Best execution” may suffer.
Custodians: Offer artificially low stated custody fees, while they enjoy hidden profits from securities lending, currency exchange and money market fund cash “sweeps.”
Actuaries: Perhaps more than any other parties, actuaries may turn out to be the greatest culprits. Ridiculously high actuarial rates of return, “revenue neutral” DROP plans and other advice reflecting the wishes or dreams of clients, as opposed to financial reality, may result in these firms facing massive lawsuits.
Lawyers: Collusion between lawyers representing pensions and other vendors to the funds. The enormous fees related to class action cases have resulted in many pension lawyers drifting from their areas of expertise (such as benefits/disability) into investment matters. Fees earned by lawyers are not fully disclosed and neither are conflicts.
The High Cost of Wrongdoing
From our investigations we have observed that corrupt practices can easily cost a pension 10% of its value over time. This is substantial, quantifiable harm. In an environment where market returns are limited and plan sponsor or taxpayer ability to fund pensions is increasingly strained, the cost of this corruption is unacceptable.
If the nation’s public pension funds don’t clean, they’ll end up where the private defined benefit plans are today: on the verge of becoming extinct, with promises to participants broken.
My message: CLEAN UP or be SHUT DOWN!!
Trouble in Paradise: Florida’s Public Pension Problems In Florida we have a unique problem. There are hundreds of local police, fire and general employee public pensions that are being preyed upon by brokers masquerading as pension experts.
These brokers, employed by the major wirehouses, have been providing conflicted advice to pensions in our state for years. The information and advice they have been providing regarding asset allocation, manager selection and performance has been tainted by undisclosed conflicts of interest, hidden financial arrangements and outright fraud. In 2001 I first warned police and fire pensions in the state of this problem and it has gotten worse, not better.
The result of this wrongdoing is that certain brokerage firms and money managers are profiting handsomely from fleecing our state’s public pensions and the taxpayers are losing hundreds of millions annually. This wrongdoing will become public in the near future and the taxpayers, I can assure you, are not going to be happy.
Currently the FBI, the State securities officials and the SEC are investigating the issues involved and we have been working with the authorities to identify the wrongdoing. Yet all but one of the hundreds of pension Boards involved has
refused to investigate alleged wrongdoing involving their financial advisers, despite the generally terrible investment performance of most of these funds. Why would Florida public pension trustees be so resistant to taking action against corrupt financial advisers? That’s a question I frequently ask myself. Here’s the explanation I’ve come up with.
1. Personal relationships: One part of the answer is clearly that trustees have longstanding relationships of trust and confidence with their investment consultants. These longstanding relationships have been fostered over the years through entertaining, dining, and conference sponsorships.
I don’t care how much you like someone, if he may be secretly profiting from his relationship as a financial adviser to your fund, at a minimum be prepared to audit or investigate his work on a regular basis. If he’s honest and ethical, he should have no problem with this. Most governmental entities have a provision in their contracts which permit them to audit their contractors. This should be Standard Operating Procedure for pensions.
To audit is not to accuse of wrongdoing. It’s prudent management. It fosters accountability and responsible behavior.
2. Trustee Culpability: Many trustees fear they will look badly if wrongdoing occurring under their watch is uncovered. In my opinion, this concern is often overblown. These are esoteric business practices we’re talking about that have only recently become well-publicized. Until May 2005 even the SEC/DOL were not aware of these problems. So the clock started ticking May 2005. If you respond to these new concerns in a timely manner, you’ll be applauded. If you deny and delay, you will be justly criticized.
Not one of our clients has ever been criticized for recovering monies from pension wrongdoers.
On the other hand, sometimes trustees may be culpable. I am aware that trustees of some pensions have personal investment accounts with brokers and money managers that provide services to their funds. These trustees are wading into very dangerous ethic waters and should think about what they are doing. This is one area where the risk of criminal prosecution exists.
They may think they’re doing nothing wrong and as long as they’re losing money in their personal accounts while the fund they’re associated with does great, they may be ok. How happy will they be then? But if they’re making money while the fund suffers, they’d better be prepared to answer difficult questions. In other words, it’s a no-win situation for trustees and I know some trustees are involved in this conduct.
3. Due to the economics of the pension management industry, where far more money can be made from selling products to pensions than from in-depth investigations of investment wrongdoing, there is a chorus of voices denying problems exist and discouraging meaningful investigations. There are few voices urging greater scrutiny.
In summary, for these three reasons, personal relationships; fears of culpability and economics of the industry, public and private pension trustees are only slowly accepting the need for forensic investigations. The consultants in Florida are fighting fiercely our proposals to investigate their activities. One firm has been brought in a partner from a national law firm that regularly defends them to argue against forensic audits. This is utterly inappropriate.
The party to be investigated NEVER should have a say in whether they are. It’s preposterous! Pension lawyers often are part of the problem. In my experience, pension lawyers generally do not urge their clients to consider forensic investigations. Why would lawyers to pensions oppose such investigations? You would think that, as lawyers, they would be the first to see the merits of a forensic review.
There are many reasons pension lawyers have not embraced our message. First, all lawyers that are on a retainer, that is, have ongoing relationships with their clients, are understandably hesitant to push their clients to take action which may be politically sensitive or unpopular. I can tell you from personal experience years ago, telling your client a truth he doesn’t want to hear can have its consequences. Boards do not want to hear their friendly financial advisers may have been ripping them off. They’d rather fire the lawyer.
Second, these lawyers lack expertise in money management matters. This is a very narrow specialty. What is involved is a very complex intersection of law, securities and money management. I can assure it’s not a something you can learn overnight. Third, they may be concerned that the advice they have given in the past regarding these complex matters (advice they may realize they should never have given) will be called into question. Fourth, it is a matter of record that some lawyers may have received undisclosed compensation from the very investment firms involved.
So pension boards may have to push their lawyers into action; up to this point, in my opinion, the lawyers have not taken a leadership role. In 1997 I returned to Uganda, for the first time since my father’s disappearance. I visited our former home, the walls of which were pock-marked with bullet holes and the doors and windows boarded-up. I was introduced by local intelligence operatives to General Muntu, the Commander in Chief of The Ugandan Peoples Army.
With General Muntu’s assistance I was escorted to the Army barracks in Mbarara. There I met with soldiers who were present that day in 1971 when 300 men were clubbed to death on the parade grounds. They told me the incredible story of how, without a single shot fired, 300 men were beaten to death with fists and clubs by their fellow soldiers, as their names were read aloud one at a time by the officer in charge. The condemned men’s only crime was belonging to the wrong tribe. I was led to the prison cell where my father had been held. I met the men who were present when my father was murdered, one of whom was in prison on death row for other murders he had committed. Perhaps its no surprise that even 26 years later no one admitted participating in the killings or having knowledge of how my father died.
With a team of hired men, we dug for hours in the hot sun for the body of my father beneath a tree on a dry, wide African plain. His body has yet to be found. My final journey to Uganda last year to retrieve his body with the assistance of the Ugandan Government was cancelled due to the hurricanes we experienced in Florida. God willing one day I will learn how my father died and bring him home. I am committed to do this. I am not here to tell you what you should do, what is moral or right or what your life’s work should be. I have no illusions that I can convince others to do what they would not otherwise do. But let me conclude by asking you…paraphrasing the words of Justice Jones of the High Court of Uganda, a man I never met but whose courage was an inspiration to me at age 17, “Do you really want to know the truth about what goes on within your pension plan?’ Do you?
If you do, I’m prepared to do my utmost to provide you with it. Even if you’re not interested, I’d like to hear from you so I can understand better your objections and concerns. Thank you.