Author: Ted Ballantine

A municipal pension fund in Michigan is suing Boston-based broker LPL Financial for allegedly misleading investors during a share buyback.

The Charter Township of Clinton Police and Fire Retirement System is seeking class-action status for its suit.

The alleged scheme, says the pension fund, allowed one of the broker’s largest shareholders to sell its LPL shares at an inflated price.

More details from the Wall Street Journal:

A Michigan pension fund has filed a lawsuit seeking class-action status against the Boston-based brokerage firm, saying it allegedly misled investors to inflate its stock price amid a $250 million share buyback plan that mostly benefited one institutional investor, according to the complaint filed in the U.S. District Court in the Southern District of California.

The Charter Township of Clinton Police and Fire Retirement System, which bought 4,000 shares of LPL earlier this year, says in the suit that LPL Chief Executive Mark Casady and Chief Financial Officer Matthew Audette conducted a “fraudulent scheme to allow” private-equity firm TPG to unload a lot of its LPL shares at an “artificially inflated price.”

[…]

LPL said in November that it would use $500 million from a debt refinancing to repurchase shares.

A month later, on Dec. 8, Messrs. Casady and Audette spoke at a Goldman Sachs Group Inc. conference and allegedly “made false and misleading statements” regarding LPL’s financial fourth-quarter financial performance, according to the complaint. Among the statements, LPL’s executives described its earnings stream as “quite steady” and said it had been executing its business plans well in the final months of 2015, the complaint says. Besides that, executives said commission revenue would be “more of the same,” compared with the third quarter, the complaint adds.

LPL shares rose the day of the conference, reaching $45.06 a share. Then, two days later, LPL followed through on half of its buyback plan, spending $250 million. Three-quarters of those funds were used to purchase 4.3 million shares of LPL common stock from TPG at $43.27, giving the buyout firm a $187 million profit, the complaint says.

Two months later, on Feb. 11, LPL disclosed fourth-quarter results that were below analyst expectations, causing its shares to fall to $16.50 a day later, erasing a third of their value in a single day. The company’s fourth-quarter profit fell roughly 45% to $48.5 million from the year-earlier period, while revenue dropped 8% to $1.02 billion.

Neither party commented on the matter.

 

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The Council of Institutional Investors, which represents the largest pension funds in the U.S., is urging companies to halt a particular IPO structure that gives more control to insiders and less power to investors.

From Reuters:

Members of the Council of Institutional Investors voted to adopt a new policy that all investors in initial public offerings have equal voting rights among their shares, an official of the group said. They are concerned that dual-class share structures with unequal rights make management less accountable.

When executives use dual-class structures, “Basically you have insulated yourself from the broader market,” said Ken Bertsch, executive director of the influential trade association.

[…]

Bertsch and others said the group is putting a new focus on stopping dual-class and multiclass structures in IPOs now after a steady stream of them lately including e-commerce company Alibaba Group Holding Ltd (BABA.N) deal-provider Groupon Inc (GRPN.O) and social network LinkedIn Corp (LNKD.N).

Out of 174 U.S. IPOs in 2015, 27 valued collectively at $12.6 billion used dual-class structures, according to Dealogic. In 2014, 36 IPOs used the structure, with a total value of $9.9 billion, out of a total of 292 U.S. IPOs.

Corporate leaders have defended the structures at bigger companies including Viacom Inc (VIAB.O) and Google parent Alphabet Inc (GOOGL.O). They argued the extra voting power given to founders and top executives helps protect against pressure for short-term returns, especially as activist hedge funds gain clout.

Despite counting many of the largest investors in the world among its members, the Council has been unable to make progress in this area in the past.

 

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In a move akin to paying a mortgage with a credit card, Chicago on Monday borrowed $220 million to make its required 2016 payments to its pension systems.

However, a bill currently sits in the stalemated legislature that would reduce Chicago’s 2016 short-term pension costs significantly by stretching out payments over time.

If that bill is passed – as it is eventually expected to be – Chicago will return the $220 million to its line of credit.

More from the Chicago Tribune:

A potential year-end budget shortfall has forced Mayor Rahm Emanuel’s administration to borrow $220 million in yet another sign of the city’s precarious pension funding status.

The city drew the money down from its $900 million line of short-term credit, which is akin to putting the tab on a credit card. The loan carries an interest rate of about 3 percent.

The money is not due to police and fire pension funds until the end of the year. But the city had to borrow the money to meet a March 1 deadline for having the cash in its treasury, Budget Director Alexandra Holt said. “State law requires that we deposit the money with the treasurer to demonstrate we have the money available if it’s needed,” she said.

[…]

Emanuel’s budget still depended on Gov. Bruce Rauner to sign a bill that would stretch out the payments and reduce this year’s cost by $219 million.

Although the state House and Senate, both controlled by Democrats, approved the bill, they have not sent it to the governor for fear he’ll veto it if they don’t sign on to his pro-business, union-weakening agenda.

The state Supreme Court on Thursday will rule on the legality of the city’s 2014 pension reform law.

 

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The Illinois Supreme Court on Thursday will announce its judgment on the legality of Chicago’s 2014 pension reform law.

A lower court declared the law – which mandated higher contributions for current employees and reduced cost-of-living adjustments for retirees of two city pension systems – unconstitutional.

More on the upcoming ruling, from Reuters:

The Illinois Supreme Court on Thursday will release its ruling on the constitutionality of a 2014 state law aimed at boosting funding for two of Chicago’s pension funds, according to a court spokeswoman.

In oral arguments before the court in November, Chicago asserted the law affecting its municipal and laborers’ retirement systems actually benefited workers and retirees by taking steps to avoid insolvency for the funds.

The state law required the city and affected workers to increase their pension contributions and replaced an automatic 3 percent annual cost-of-living increase for retirees with one tied to inflation. The increase would be skipped in some years.

Without reforms, Chicago warned that the two funds would run out of money within 10 to 13 years.

City unions and retirees that filed challenges to the 2014 law contended Chicago merely wished to avoid paying for benefits promised to its workers, in violation of the state constitution’s pension protection clause.

Municipal bond investors, for their part, had declared the case a loss for Chicago months ago.

 

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Japan’s Government Pension Investment Fund, the world’s largest pension fund, named a new president this week.

He takes the helm of a pension fund undergoing rapid change and facing many challenges.

From Bloomberg:

The world’s biggest pension fund named former agricultural banker Norihiro Takahashi as president, bringing in a new manager to take the reins in a Japanese election year marked by volatile stock trading.

Takahashi, 58, will replace a retiring Takahiro Mitani. He faces a tough introduction to the job as president of the $1.2 trillion Government Pension Investment Fund. Opposition politicians claim that the fund has invested too much in stocks after doubling its allocation of equities in 2014 with the blessing of Prime Minister Shinzo Abe.

That criticism is only likely to increase in the run-up to elections which are likely this year, after a volatile start to 2016 whipsawed global equity markets and the Nikkei 225 Stock Average had its worst start to a year on record. Japanese stocks have recovered about half their losses after tumbling more than 20 percent through Feb. 12.

“Takahashi is going to have to be very mentally strong,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “Even if he gets pressure from above him, I hope he’ll do what’s right for pensioners, not politicians.”

He’ll begin the job on April 1.

 

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Greece and its lenders – including inspectors from the International Monetary Fund and the European Central Bank – made progress this week on the country’s pension reforms, according to a report from Reuters.

The country’s next round of bailout money is contingent on these reforms.

Greece has resisted steep pension cuts, and has struggled to meet inspectors’ demands as lenders disapproved of portions of the country’s proposed pension reforms.

More from Reuters:

Inspectors from the European Commision, the European Central Bank and the International Monetary Fund assessing Greece’s progress on reforms left Athens on Sunday, taking a break for the Easter holiday in western Christianity.

“The mission made important progress on key aspects of the pension reform. Work is ongoing and will continue over the Easter break. The mission chiefs will return to Athens on April 2 to resume the discussions with a view to conclude them as soon as possible,” the spokesperson said.

Greek Prime Minister Alexis Tsipras wants to wrap up the reform review quickly to clear the way for talks on debt relief, help restore confidence in the country’s economy and persuade the Greek people that their sacrifices over six years of austerity are paying off.

[…]

The government, which has a parliamentary majority of just three seats, has pledged to trim its pension budget by 1 percent of GDP this year. But it wants to avoid cutting pensions for the 12th time since 2010 to plug the estimated fiscal hole.

Greek government officials said the IMF opposed key pension proposals, such as hiking social security contributions, during the latest round of talks and it wants to lower a tax-exempt threshold for low-income earners.

See more Greece coverage here.

 

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The Department of Labor’s proposed fiduciary rule would make a fiduciary out of any advisor giving 401(k) investment advice.

But many advisors are likely to outsource that risk, explains InvestmentNews:

Outsourced investment advisory services for 401(k) plans stand to reap the benefits of the Labor Department’s proposed rule to raise investment advice standards in retirement accounts.

Here’s how the outsourced services generally work: The providers contract with record-keeping firms, which then offer the services to all defined contribution plans on their platform. Under the 3(21) service, outsourced providers screen the funds available over a record keeper’s platform, and narrow those down to a handful of funds in certain asset categories that advisers and plan sponsors can then use to build a final 401(k) lineup. In the 3(38) offering, the providers — not the plan adviser or employer — choose the ultimate combination of funds.

[…]

Industry watchers expect even more uptake if the DOL rule becomes final, in part because these outsourced services tend to be used mostly in the small and micro 401(k) market.

“There’s definitely going to be heightened liability in serving [401(k)] plans, especially smaller plans,” said Scott Cooley, Morningstar’s director of policy research. (Of course, he added, this depends on the text of the final rule, which is likely to come out this month or early April.)

Click here for a fact sheet on the proposed rule.

 

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Pension funds will have trouble closing their funding gaps in the remainder of 2016 fiscal year due to lackluster returns, according to a Moody’s report.

The report, which analyzed 56 US public pension funds, projects a 5 percent return as the best-case scenario for the rest of the fiscal year.

More from Financial Times:

Moody’s, the rating agency, said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps.

Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year….

In the most optimistic scenario, where average returns totalled 5 per cent, the collective funding gap [for the 56 plans in its study] would still widen by more than $200bn.

Moody’s estimates the scale of the unfunded liabilities is greater than officially reported because of the generous discount rate public pension plans use to value retirement benefits. The rating agency said the schemes collectively have a deficit of $1.7tn, which could rise to $2.2tn this year if the pension plans suffered negative returns.

[…]

Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, said public pension plans face “grave difficulties”.

“I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit and the cities of Vallejo, Stockton and San Bernardino,” she said.

If you’re a Moody’s subscriber, you can view the report here.

 

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