investigations of pension fraud, money management abuse, wrongdoing, securities brokerages, pension investment consultants, unethical business practices, benchmark alert, institutional investors, plan sponsors
investigations of pension fraud, money management abuse, wrongdoing, securities brokerages, pension investment consultants, unethical business practices, benchmark alert, institutional investors, plan sponsors
investigations of pension fraud, money management abuse, wrongdoing, securities brokerages, pension investment consultants, unethical business practices, benchmark alert, institutional investors, plan sponsors
(July 25, 2006 ) End of the (Presumption of) Innocence

Money Matters

There are five articles presented below.

End of the (Presumption of) Innocence

“Unconditional love, critical to effective parenting, is fatal in investment matters.”

In a January 2001 article entitled “When Money Managers Are Sanctioned By the SEC” we wrote about the quandary facing a pension that had learned from a third party that one of its money managers was going to be sanctioned by the SEC. The manager subsequently confirmed the rumor to the pension but indicated that the impending SEC action was related to a minor compliance oversight. The SEC, consistent with its policy of not commenting upon investigations, would not provide any information to the pension regarding the severity of the matter. What’s a fiduciary to do?

The unnamed fund whose predicament gave rise to our 2001 article was the Ohio Bureau of Worker’s Compensation. Our advice to the BWC at the time was to terminate the manager immediately. The manager involved was Tiffany Capital and the firm was terminated by the BWC (eventually—in 2003) and shortly thereafter closed its doors following very serious SEC findings. We all know what subsequently happened at the BWC. Enough about that.

Increasingly firms providing critical services to pensions involving high degrees of trust and confidence are the subjects of allegations of illegalities and improprieties. Grand Jury and FBI investigations involving vendors to public pensions especially are becoming more commonplace. Some firms that have been indicted and even convicted have managed to maintain pensions as clients. It is remarkable the degree to which certain pensions have been unwilling to accept the fact that firms that provide professional services to them have, in fact, engaged in harmful wrongdoing.

There is a presumption of innocence in our jurisprudence that applies to criminal matters generally. Does this presumption of innocence apply in civil as well as criminal matters? Of course not.

Yet we recently were advised by legal counsel to a pension that a firm indicted, but not convicted, should still be retained by the pension on the theory that absent a guilty finding there was no basis for a firing. We call that very confusing legal advice.

Are pensions required to maintain relationships with firms that provide professional services despite serious allegations of wrongdoing? Is the threshold for firing a pension consultant, money manager, broker or law firm a criminal conviction?

What’s going on here? In simplest terms there are three things which we humans generally value most dearly. They are (1) our families; (2) our health; and (3) our money. When posed with the question of the application of the presumption of innocence in these areas the answers are clear to most of us.

If allegations of serious misconduct arose concerning our children’s care giver, would we act immediately or await a final outcome? If our family physician were implicated in wrongdoing, would we give her the benefit of the doubt? If there were credible rumors of financial shenanigans involving the financial institution handling our personal savings, would we rush to secure our life’s savings? You bet we would. There is no presumption of innocence in civil matters, regarding whom we choose to do business with. To even mention the presumption of innocence in this context is muddled thinking. But is it intentionally muddled thinking?

Pension assets belong to someone. That someone, if asked the question, “would you prefer to allow a firm implicated in wrongdoing to continue to handle your money” would likely answer quickly and firmly, “no.” However, fiduciaries overseeing pensions often do not see the answer so clearly. After all, it’s not their money. And there may be political, social or personal factors that influence these fiduciaries. Put simply, somebody with influence likes the guy.

Love your parents, love your spouse or partner, love your children, and by all means love your dog. Do NOT love your financial adviser. At least not unconditionally. All of this is so obvious you might wonder why we’re bothering to address the subject.

Believe it or not, frequently the reaction by fiduciaries to information regarding wrongdoing involving investment firms is to shoot the messenger. A client who does not wish to learn the truth is our worst nightmare. Our job is to provide an objective investigation and calculate any damages, not to provide the opinion a pension Board necessarily wants. There are plenty of highly regarded national firms that will write, for a hefty price, any sort of cover-up report a pension wants. Look at the spectacular spending on professional services that has occurred in San Diego to justify decisions involving the city’s pension. Ten of millions of dollars have been spent to defend what was done and virtually nothing to pursue wrongdoing.

When we give a Board an expert opinion, we are prepared to defend it. The opinion will only be changed if additional factual information is provided that leads to a different conclusion. There is always the possibility that such additional information exists and, assuming the party we are investigating is aware of our undertaking, we encourage that party throughout the process to provide any information they believe is relevant. Of course, pensions are free to ignore our advice and they sometimes do. (Recall the Ohio BWC case above.) Involvement by a regulator, law enforcement or a court of law may be necessary to persuade a pension to finally act appropriately.

Further, it is of little concern to us if the parties we have been engaged to investigate are pleased with our findings. This should be obvious but apparently needs to be stated. Boards may feel uncomfortable accusing someone they have gotten to know socially over the years of wrongdoing and holding them accountable. There is a tendency to let personal relationships trump professional duties; sales and marketing types employed by investment firms are very charismatic. However, if we at Benchmark were concerned about offending the parties we investigate we wouldn't be very effective investigators, would we?

The business of committing to provide objective, professional opinions in pension matters without regard as to the target of the investigation is not attractive to most firms. Indeed, the major accounting, legal and consulting firms have largely shunned this work. There is an uneasiness about delving too deeply into pension actions and industry practices. It is as if everyone feels there is something to hide.

However, we believe the reputations of Boards are enhanced, not diminished, by demonstrating willingness to examine emerging fiduciary concerns. In our experience, Boards that investigate and resolve such issues are applauded. This is a difficult concept for pension boards to embrace. Believe it or not, acknowledging that problems have been uncovered within a pension does not tarnish a Board’s reputation. Pension matters are incredibly complex, involving financial projections spanning decades. Professionalism in pension matters is a very recent development. No pension should be reluctant to address problems. All of us in the profession are constantly learning. Yesterday’s answers may not be good enough tomorrow. It is critical that pensions embrace education on emerging issues and be willing to revisit past decisions.

On the other hand, experience shows that pensions that seek to conceal questionable practices are inevitably “outed” by opposing political factions. Pensions have already become the political battleground in many parts of the country and parties seeking political advantage will increasingly find that local pensions may provide the ammunition they need.

Forensic investigations, then, can be either a sword or a shield. Pensions should be aware that there is a growing consensus regarding the methodology for such forensic investigations and a growing acceptance of the need for such regular reviews. For defined benefit plans, the best defense to growing calls for conversion to defined contribution schemes will be their ability to rapidly identify and resolve potentially embarrassing dealings.

Calvert Institute Report: The Baltimore City Retirement Systems: Heading For Trouble

A fundamental premise of the work we do at Benchmark is that pension underperformance frequently is not merely the result of an inability to accurately predict future market developments or properly allocate assets. Underperformance is the observable symptom; however, corruption of the decision-making process, the disease. The solution is regular investigations aimed at ferreting out conflicts of interest, undisclosed financial arrangements and outright malfeasance.

Increasingly the public is being exposed to more complete analyses of problematic pensions, primarily through investigative reporting by the press. However, a recent report entitled, “The Baltimore City Retirement Systems: Heading For Trouble,” by the non-profit Calvert Institute for Policy Research is particularly insightful and we encourage readers to view it at

In particular, the Calvert report draws attention to the issues of (1) contributions made by money managers and brokers to elected officials with the ability to influence pension decision-making and (2) minority money manager programs, both of which are subjects we have alerted readers to in the past. We believe that law enforcement will continue to investigate the connection between political contributions and public pension hirings around the country and that criminal prosecution may be the most effective means of combating these abuses.

Delray Beach Firefighter Fund May Be Owed Millions


By Erika Slife

South Florida Sun-Sentinel

A financial consultant to the city's police and firefighter pension board could owe the fund more than $2 million, according to an independent investigator hired to review the $104 million retirement account. Smith Barney trading records show that the company earned "undisclosed trading profits" during its consulting relationship with the pension fund, said investigator Edward Siedle, of Benchmark Financial Services. He declined to elaborate.

But in a June 26 e-mail to board members, Siedle wrote: "Based upon the information supplied by Smith Barney I have reviewed (which is not the complete information I requested) it appears that the city of Delray Beach Police and Firefighters System may be entitled to recover damages from Smith Barney in excess of $2 million. If the complete information I requested from Smith Barney was provided and further analysis undertaken, it is possible the damages may be significantly greater." A representative from Smith Barney declined to comment.

Siedle, a former U.S. Securities and Exchange attorney, has been looking into the fund's relationship with Smith Barney since February 2005. Smith Barney is a consultant and broker for the fund. It advises the fund on which money managers to use and collects commissions from trades made by many of those managers. The board's contract with Smith Barney, which began in October 1995, states that the fund's performance is to be reported in quarterly reviews with financial fees disclosed.

Last month, Smith Barney conceded that, in an "administrative error on our part," it had failed to disclose costly trading fees for about eight years. Experts said such an omission could have distorted the retirement system's investments to look like they performed much better than they really did. Taxpayers ultimately are responsible for the fund, from which hundreds of public safety officers' retirement payments are drawn.

Board members said an outside counsel would review Siedle's findings and make a recommendation on how to proceed at the board's August meeting. They said they are taking the investigation seriously but are not jumping to conclusions until the results can be corroborated.

"I think it's only fair," board member Lt. James Tabeek said. "Any time you're dealing with public funds, any money that's wasted one way or another, whether it was a clerical mistake or whatever, if the money was not entitled to certain people, it's our job to find out how did it happen and is there any damages."

Erika Slife can be reached at or 561-243-6690.

Publication Date: Saturday, July 15, 2006 Edition: Palm Beach Section: LOCAL Page: 3B



Smith Barney inaccurately reported Delray Beach's fund performance from 1995 to 2003

P&I Daily June 22, 2006 Delray Beach (Fla.) Police and Fire Retirement Fund consultant Smith Barney inaccurately reported the fund's performance from 1995 to 2003, the consulting firm reported to an investigator working on behalf of the $100 million fund.

Smith Barney's reports over that period didn't include fees paid to the funds' managers or to Smith Barney, Robert J. Mandel, Smith Barney attorney, wrote in a letter to Edward A.H. Siedle, president, Benchmark Financial Services, which is conducting a forensic audit of the Delray Beach fund's vendors.

In the second quarter of 2003, Smith Barney began including managers' fees when reporting performance, the letter said. "Performance was not corrected retroactively" until the firm provided revised performance reports at the Dec. 7, 2005, board meeting, Mr. Siedle said.

Smith Barney also used a benchmark for the fund that exceeded 100% - 65% S&P 500, 40% Lehman Brothers government/credit index, and 5% 90-day Treasury bill index - since January 2002, according to the letter. Mr. Mandel did not provide an explanation in the letter.

Also, Smith Barney measured equity and fixed-income managers' against benchmarks that were 95% invested in indexes reflective of each manager's style and 5% Treasury bills "because these managers traditionally have approximately 5% of their portfolios in cash or cash equivalents at any time," Mr. Mandel wrote.

Such a benchmark gives "a manager in a rising market an edge," Mr. Siedle said. "The manger is investing up to 100% in stocks, yet he's being measured against a benchmark of only 95% stock."

Stephen H. Cyper, counsel for the Delray Beach fund, declined to comment on the letter, saying Mr. Siedle is continuing the investigation and the fund is seeking additional documents from Smith Barney.

Mr. Mandel didn't return calls.

Alex Samuelson, Smith Barney spokesman, said: "We conceded there were reporting errors. That has been fixed for the last three years."

Smith Barney has been consultant to the fund since 1995, he added.

Pension Board Warns Financial Consultant

By Erika Slife, Sun Sentinel July, 24 2006

The city's police and firefighter pension board voted 5-3 Wednesday to give notice to its financial consultant, Smith Barney. The board made the decision after an independent investigator's review of the $104 million retirement fund. The investigator concluded that Smith Barney could owe the retirement account more than $2 million.

The board will decide in August whether to actually dismiss Smith Barney. The decision will depend on a recommendation from the board's legal counsel, which is reviewing the investigator's findings.

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