Administration March 10, 2007

CalPERS/CalSTRS Reach Settlement With WorldCom

October 27, 2005 (PLANSPONSOR.com) - California's public pension funds announced they will receive over $250 million in a settlement of a lawsuit against former WorldCom executives and several investment banks.
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In a press release it was revealed that the California Public Employees Retirement System (CalPERS) is expected to recover more than $200 million, while the California State Teachers’ Retirement System (CalSTRS) will recover $38.7 million and the Los Angeles County Employees’ Retirement Association (LACERA) will recover $18.7 million.

According to a FOX News report this is just part of a $651 million settlement reached for a group of 68 state and local retirement funds for states including California and Illinois.   Like New York’s public pension funds, CalPERS, CalSTRS, and the others believed their own suit would get them a better deal than participating in the class-action suit against WorldCom and the banks (See  NYC Public Pension Funds Reach Settlement in WorldCom Suit ).   The class action suit was settled for $6.1 billion to be spread among 830,000 institutions and individual investors (See  Hevesi Settles with Last WorldCom Defendants ).   According to the office of William Lerach, lead attorney for the 68 plaintiffs in the CalPERS case, the $651 million represents an 83% premium above what the funds would have received in the class action settlement, FOX News said.

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The lawsuit, filed in July 2002, among other allegations accused investment bankers of failing to do adequate due diligence before underwriting $12 billion worth of bonds for WorldCom issued in May 2001, the CalPERS press release noted.   The defendants included J.P. Morgan Chase & Co., Deutsche Bank, Salomon Smith Barney, and Bank of America, ABN Amro and four other foreign banks, lead underwriters in the 2001 bond sale, as well as WorldCom’s accounting firm, Arthur Andersen LLP.

Under the settlement, Citigroup and J.P. Morgan also agreed to support a proposed market reform initiative, CalPERS said in the release.   They, together with CalPERS, CalSTRS, LACERA, and other institutional plaintiffs, will jointly petition the US Securities and Exchange Commission to issue rules requiring more disclosure in future securities offers, including more information about loans to issuers and the issuers’ officers, increased information about allocation of IPO shares to the issuers’ insiders, and greater transparency about research coverage underwriters provide about issuers.

On top of the $651 million, FOX News reports that Lerach expects to gain additional funds from the disgorgements paid by former WorldCom Chief Executive Bernie Ebbers and former Chief Financial Officer Scott Sullivan, both of whom were sentenced to federal prison and heavily fined for their roles in the accounting scandal.

Compliance March 9, 2007

Grassley Presses for Hedge Fund Registration

March 9, 2007 (PLANSPONSOR.com) - Concerned about pension fund exposure to the asset class, a senior lawmaker is calling for greater hedge fund registration.
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“The secretive way that hedge funds operate might not be an issue for the super rich who first invested in hedge funds, but today the average Joe has a stake as pension funds are invested in hedge funds,” said Senator Chuck Grassley (R-Iowa), who has offered an amendment that would require hedge funds to register with the Securities and Exchange Commission.  

Grassley filed his amendment to S.4, the 9-11 homeland security legislation now being debated by the full Senate. Grassley said the amendment is relevant to the larger bill as reports have indicated terrorist links to some pooled investment groups including hedge funds.  “My amendment gives Congress a good opportunity to say there should be greater transparency with hedge funds,” Grassley said.  

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Statutory Exemption

Grassley’s amendment would affect section 203(b)(3) of the Investment Advisors Act of 1940 (15 U.S.C. § 80b-3(b)(3)), which currently provides a statutory exemption from registration for investment advisers who had fewer than fifteen clients in the preceding twelve month period and who does not hold himself out to the public as an investment adviser.   According to a  press release , the amendment would narrow the exemption that is currently used by large, private pooled investment vehicles to avoid registering with the Securities and Exchange Commission.

The amendment would authorize the SEC to require investment advisers to register

unless the advisor:

  • had $50,000,000 or less in assets under management,
  • had fewer than fifteen clients,
  • did not hold himself out to the public as an investment advisor, and
  • managed the assets of fewer than fifteen investors, regardless of whether the investors participate directly or through a pooled investment vehicle, such as a hedge fund.

Call for Action

Introducing the bill, Grassley said Congress needs to act because the D.C. Circuit Court of Appeals last year overturned a regulation imposed by the Securities and Exchange Commission requiring hedge funds to register.   The appellate court said the SEC failed to justify its definition of “client” in the new rule and that its interpretation “falls outside the bounds of reasonableness” and comes close to violating “the plain language” of the 1940 Investment Advisers Act (see  Court Throws out Hedge Fund Registration Rule ).    

The rule imposed by the SEC last year would have required managers that run hedge funds with at least 15 US clients to register as an investment adviser with the SEC.   It required each hedge fund investor to be counted as a client, forcing most large managers to register with the SEC, and to provide the SEC with basic information about themselves and submit to spot inspections (See  SEC Imposes Hedge Fund Registration ).   The SEC subsequently said it would not appeal the appellate court decision (see  SEC Will Not Appeal Ruling on Hedge Fund Registration ).

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