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Update: Naked Capitalism vs. CalPERS

The CalPERS Building in West Sacramento, California.

Last winter, Susan Webber, who runs the financial blog Naked Capitalism, filed a public records request with CalPERS seeking the fund’s private equity return data. According to Webber, CalPERS didn’t fulfill the request – and so Webber filed a lawsuit to get it.

After a few months of back-and-forth, CalPERS said last week it had given Webber the data she requested. But Webber, in a post over the weekend, says otherwise. From Naked Capitalism:

To update you on the state of play with CalPERS: since we received some financial data in February and March, CalPERS has engaged in foot-dragging. Even though CalPERS said in court filings that it stood ready to provide the data we sought, it has failed to do so. For instance, CalPERS’ Deputy Executive Officer for External Affairs, Robert Glazier, promised in mid April that he would send an important missing spreadsheet the following week. More than six months have passed and CalPERS has yet to provide it.

We have three types of data we are seeking: the spreadsheet mentioned (CalPERS has provided an 627 page image, but under California’s version of FOIA, they are required to provide machine-readable records in data form, but continue to fail to comply), commitment dates (CalPERS has consistently ignored this request) and detailed cash flows (of which CalPERS has only provided partial information; by our count, we are still 351 funds short). So of three requests, for two we have yet to receive any information, and for the third, we have received only partial information.

You can read more about the lawsuit and the FOIA results here. CalPERS’ response to Webber’s blogging can be read here.

Photo by Stephen Curtin

Court: CalPERS Can Sue Credit Rating Agencies Over Investment Losses

CalPERS lost over $10 billion during the financial crisis, and many of those losses stemmed from financial instruments given top-notch ratings by ratings agencies Moody’s and Standard & Poor’s.

CalPERS filed a lawsuit against the agencies for assigning ratings that misrepresented the quality of the failed investments, but the lawsuit had been held up for months as the agencies appealed the suit’s legitimacy in the lower courts.

But on Wednesday, the California Supreme Court ruled that CalPERS could indeed sue the agencies. From the San Francisco Chronicle:

The lawsuit involved its $1.3 billion investment in 2006 in three financial products – Cheyne Finance, Stanfield Victoria Funding and Sigma Finance – that had gotten the highest ratings from Moody’s and Standard & Poor’s. They were securities issued by banks and management companies and available only in private offerings to a limited number of institutional investors, including the pension system.

Only after all three went bankrupt in 2007 and 2008, CalPERS said, did investors learn that the products’ assets consisted largely of high-risk subprime mortgages. The suit also alleged that the rating agencies’ fee agreements had a built-in bias, entitling them to full fees only if they issued passing grades.

The ratings agencies had argued that their ratings were a form of free speech. The court agreed, but pointed out an important qualifier:

While investment ratings are a form of free expression, said the First District Court of Appeal in San Francisco, they are not mere expressions of opinion or predictions of success, which are immune from negligence suits. Instead, the court said, the ratings are factual assertions, issued “from a position of superior knowledge” about the investments’ financial health, and thus can be challenged if made falsely and carelessly.

And while federal law prohibits states from regulating credit-rating agencies, damage claims for misrepresentation are “within a field traditionally occupied by the states,” Justice Martin Jenkins said in the 3-0 appellate ruling.

Both ratings agencies appealed the decision Wednesday, but the court denied their appeals.

Morgan Stanley Likely To Be Sued Over CalPERS Investment Losses

An SEC filing this week revealed that Morgan Stanley is anticipating a lawsuit from the California Attorney General stemming from massive investment losses sustained by CalPERS in 2007.

CalPERS claims it lost over $199 million on those “toxic” real estate investments, which it bought from Morgan Stanley after the bank allegedly “misrepresented” the quality of the investments.

The lawsuit concerns investments CalPERS made with Cheyne Finance LLC in 2006. The firm went bankrupt in 2007, leaving CalPERS with massive losses.

CalPERS has previously filed lawsuits against several ratings agencies for the AAA ratings they assigned to structured investment vehicles produced by Cheyne in 2006. More details from the Sacramento Bee:

California officials are threatening to sue investment bank Morgan Stanley over a series of toxic real estate investments that allegedly cost CalPERS nearly $200 million.

Morgan Stanley, in a Securities and Exchange Commission filing earlier this week, said it was told by California Attorney General Kamala Harris in early May to expect a lawsuit over its marketing of the investments, which were made during the housing boom. Harris said the bank misled investors and she is likely to seek triple damages.

In its filing, the bank said it “does not agree with these conclusions and has presented defenses” to the attorney general. A spokesman for Harris declined comment.

The bank said the potential lawsuit revolves around its marketing of “structured investment vehicles,” a series of deals developed by a firm called Cheyne Finance. The vehicles were grab bags of mortgage loans and other assets.

Between 2007 and 2009, CalPERS lost around $1 billion on its investments with Cheyne and two other SIVs, according to its lawsuit against S&P.

Photo by Jim Yi/Flickr CC License