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CalPERS Criminal Prosecutions Needed To End Public Pension Fraud

This article is more than 10 years old.

Yesterday a federal grand jury indicted two former top officials of CalPERS, the nation’s largest public pension fund on fraud, conspiracy and obstruction charges. Three years after the “pay-to-play” influence peddling scandal surfaced at the $225 billion fund, the Department of Justice may be poised to investigate and prosecute public pension corruption nationally. Take my word for it, there’s enough public pension corruption across the country to keep DOJ busy for decades.

As a seasoned public pension forensic investigator, it has long been my opinion that potential criminal charges are needed to deter politically-savvy scammers who are confident they will not be held accountable by pension officials they have cozied-up to—officials who are, at a minimum, conflicted and often outright culpable.

The Wall Street public pension trough feeding frenzy has, unbeknownst to taxpayers and government workers participating in these funds, cost the nation trillions and is only getting worse with the proliferation of hedge funds and private equity alternative investments.

Investigating abuses related to the investment of the assets of these funds is no easy matter. Public pensions are arcane and lacking in transparency. There is no comprehensive state or federal regulation of these retirement behemoths. ERISA protections do not apply to public pensions and even where state regulations exist, there is no meaningful enforcement.

In Draining the Public Pension Swamp, I wrote in 2009 that the hunt for criminal activity involving public pensions had just begun. The analogy I raised to pension intermediaries secretly profiting from money managers was that of a contractor hired by a city to build a road who solicits kick-backs from sub-contractors. Kick-backs related to road, or pension portfolio, construction have always seemed illegal to me. The simple point is that the public is being fleeced.

The national debate regarding public pension woes to date has focused almost exclusively upon inadequate funding of these retirement plans and the supposedly unsustainable benefits promised to workers. Virtually no attention has been paid to widespread malfeasance, or mismanagement, of pension assets. Is it possible that public pension boards, consisting of firefighters, cops and school teachers, never get snookered by Wall Streeters?

State securities regulators, at-will employees trained to stay clear of political quagmires and state Attorneys General, who are elected, have assiduously avoided investigating public pension abuses. They know better than to venture into these uncertain waters and won’t—even when the evidence neatly lands upon their shores. The SEC, likewise, is reluctant to stray into local politics.

It is as if Wall Street treated public pensions with more integrity than it treated the nation’s retail investors. Don’t believe it.

From beanie babies to rare coins, I have seen myriad unimaginable, improbable investments in public pension portfolios. It's about time stealing from public employee retirement plans is treated as a crime.