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Pension Files Class Action Suit Against Volaris Over Investment Losses

A Georgia pension fund has filed a lawsuit against Mexican airline Volaris; the fund is accusing the company of making false statements in its regulatory filings.

From Reuters:

The lawsuit, which seeks class-action status, was filed on Tuesday in the U.S. District Court for the Southern District of New York on behalf of the DeKalb County Employees Retirement System. It said Volaris omitted or misstated information in U.S. filings ahead of its September 2013 listing of American depositary receipts.

The complaint accuses Volaris and some executives and directors with failing to disclose financial effects resulting from a change in the company’s reservation system as well as increased competition in certain markets.

The lawsuit also says Volaris’ registration statement “negligently contained financial statements that were presented in violation of applicable accounting standards and the company’s publicly disclosed accounting policies.”

A Volaris spokesman was not immediately available for comment.

The DeKalb County Employees Retirement System manages about $1.3 billion in assets.

Photo by Andreas Poik via Flickr CC License

New York City Pension Wants In On Lawsuit Against Real Estate Firm Accused of Inflating Prices

The New York City retirement system is attempting to join a lawsuit already being brought by two pension funds against a real estate firm that allegedly inflated its performance figures.

The two pension funds already heading the case, State Teachers Retirement System of Ohio (STRS) and the Ohio Public Employees Retirement System (OPERS), are claiming millions in losses.

From ai-cio.com:

American Realty Capital Properties (ACRP), a real estate investment trust provider, is facing a growing group of investors claiming it fraudulently inflated performance figures.

The $159 billion New York City retirement system and TIAA-CREF have filed complaints against the firm, requesting to join in an ongoing lawsuit led by two Ohio public pension funds.

In October 2014, nine days after the Ohio pensions first filed suit, the real estate firm admitted it had made intentional accounting errors, and purposely failed to correct other mistaken figures. Its stock plummeted by 30% within hours of the revelation, and closed trading for the day having lost roughly $2 billion in market capitalization.

[…]

“In light of general investor concerns about the quality of the company’s accounting functions, internal controls, and corporate governance (as highlighted by several embarrassing reporting mishaps), ACRP desperately sought to reassure investors that it had righted the ship and that its internal control systems were above reproach,” TIAA-CREF’s complaint stated.

Photo by Joe Gratz via Flickr CC License

Newspaper: Rhode Island Should Settle Pension Suit With Retirees, But Keep Savings Intact

Rhode Island Governor-elect Gina Raimondo said last week that one of her top priorities was reaching a settlement with workers in the long-running lawsuit against the state’s 2011 pension reforms.

The Providence Journal opines that a settlement would be ideal for everyone – if the law’s savings are kept intact. From the Providence Journal:

State leaders — led by Governor-elect Gina Raimondo — are again eyeing a possible settlement with the unions that are challenging the 2011 overhaul in court. The state’s goal, presumably, is to retain the bulk of the savings created by the overhaul and avoid the risk of losing — an outcome that could cost taxpayers hundreds of millions of dollars that they cannot afford.

That goal is a good one, as long as the bulk of the overhaul savings is retained. Even with those savings, the state’s public pension costs are high, and those tax dollars pay for retirement plans that are often far more generous than those in the private sector.

There is also the issue of uncertainty. The projection that the taxpayer contribution rate will slowly nudge downward assumes that the state’s $8 billion pension portfolio will meet its annual investment goal of 7.5 percent. If that goal is reached or exceeded, all well and good. But if the investment returns fall short, the cost to taxpayers could rise.

The idea of reaching a settlement also raises logistical concerns. There are more than two dozen communities enrolled in the state-run Municipal Employees Retirement System, which will be impacted by the outcome of the pension lawsuit. Naturally, most if not all of these municipalities will want to have a say in any negotiated settlement.

If a settlement is reached, it could look a lot like the one that was almost accepted in 2014. In that deal, 95 percent of the state’s savings were retained. In exchange, pension increases were given to retirees and some employees.

But that deal fell through when one retiree group rejected it.

Photo by By Jim Jones (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Court Dismisses Pensions’ Lawsuit Against BNY For Housing Crash Losses

An appeals court has dismissed a lawsuit brought by a handful of public pension funds against BNY Mellon. The lawsuit stemmed from investment losses on mortgage-backed securities and BNY’s alleged neglect to properly evaluate the quality of the securities.

From BenefitsPro:

The U.S. Court of Appeals for the 2nd Circuit has upheld a lower court’s decision to dismiss a class-action brought by pension funds against BNY Mellon.

Among others, Chicago’s police pension fund and the Grand Rapids, Michigan, city retirement fund sued BNY Mellon over claims related to losses from residential mortgage-backed securities suffered in the wake of the housing market crash.

BNY was trustee to 530 RMBS originated by Countrywide Home Loans. The plaintiffs alleged that BNY Mellon breached its fiduciary and trustee obligations by not overseeing the quality of the home loans built into the securities.

The plaintiffs had sought to build a class of any investors that owned any of BNY’s 530 mortgage securities.

In April of 2012, a U.S. District Court judge for the Southern District of New York granted BNY’s motion to dismiss the case on the grounds that the named plaintiffs had only invested in 26 of the securities, and the pension funds did not have the “standing” to bring claims against securities they didn’t own, according to court documents.

In upholding that decision, the appellate court deterred a much larger class-action, but did say the pension funds could bring claims against the 26 securities they actually invested in.

“In short, the nature of the claims in this case unavoidably generates significant differences in the proof that will be offered for each trust,” wrote Circuit Judge Debra Ann Livingston.

Photo by daveynin via Flickr CC License

Judges Sue California Over “Diminished” Pension Benefits

Six judges are suing California over “diminished” pension benefits brought on by the Public Employees Pension Reform Act, a law passed by the state in 2013.

The judges say their benefits shouldn’t be affected the law, because they were appointed a full year before the law was passed.

From the Appeal-Democrat:

Yuba County Judge Benjamin Wirtschafter and five other judges have sued the state, alleging they’re getting a raw deal on their pensions.

The judges allege the Public Employees Pension Reform Act, which became law in 2013, has increased their salary withholdings, allowed reductions in their pay in violation of the state constitution and “diminished the pension benefits they are entitled to earn,” according to the suit, filed last week in San Francisco Superior Court.

The judges were elected in 2012, so they should not be covered by the pension changes approved in the 2013 law, the suit said.

[…]

In 2012, Judges Retirement System II withheld a flat 8 percent of judges’ salaries.

Now, according to the suit, the six judges are subject to an additional 7.25 percent withholding, resulting in “a fluctuating and increasing — as opposed to guaranteed — rate of contribution toward their pension benefits.”

In addition, their “pension annuity has been diminished by application of a three-year average salary annuity formula,” the suit said.

The suit alleged judges become members of their pension system when they are elected or appointed, and “final benefits are computed with respect to the paid service performed by the time of their retirement.”

According to the suit, the 30 judges who were appointed in 2012 are covered by the pension system’s rules in place before the 2013 changes.

“Many such judges are employed in the same courthouses as (the six judges who sued),” the suit said. “(The state has) permitted such appointed judges to participate in (the pension system) under the terms in effect prior to (the Public Employees Pension Reform Act) effective date, but have denied such rights to elected judges.”

Over the summer, California lawmakers passed an amendment to the Pension Reform Act to clarify that the law didn’t apply to judges elected prior to 2013. But Gov. Jerry Brown vetoed that change.

Photo by Joe Gratz via Flickr CC License

Supreme Court To Hear Case on Excessive 401(k) Fees

Mutual fund fees will soon have their day in the highest court in the land.

The U.S. Supreme Court has agreed to hear a case centered on “excessive” fees collected by mutual funds in 401(k) plans. The case will also determine whether there should be a statute of limitations on lawsuits alleging fiduciary breach. From Investment News:

As a landmark 401(k) excessive fees lawsuit makes its way to the U.S. Supreme Court, industry experts say the court’s decision could set off a domino effect of changes — from the process of choosing plan funds to fiduciaries’ ability to obtain liability insurance.

The case in question is the famed Glenn Tibble v. Edison International, a suit originally filed in August 2007 in the U.S. District Court for the Central District of California. The original suit centers on six retail mutual funds in Edison’s plan menu, which were offered instead of cheaper institutional share classes.

Though the plaintiffs eventually received a 2010 judgment from the district court, they were granted only $370,732 in damages related to excessive fees in three of the mutual funds. The saga continued as both parties battled over fees, bringing the suit to the 9th Circuit Court of Appeals. Last week, the Supreme Court agreed to review the case.

Currently, the defendants are arguing a statute of limitations requires that plaintiffs bring a suit alleging fiduciary breach within six years of the last action constituting the breach.

The ruling will have big implications for retirement plans and the people that run them. From Investment News:

Though some ERISA attorneys interpreted the focus on the six-year statute of limitations as a litigation tactic, other retirement industry experts noted that where the court lands on that issue could shape how fiduciaries serve retirement plans and participants.

“The theory of open-ended liability that could be continuing: On the one hand, you might be more protective of participants, but on the other hand, it can limit the degree to which [liability] insurance is written,” said Jason C. Roberts, CEO of the Pension Resource Institute, a retirement plan consulting firm for broker-dealers.

Aside from the statute-of-limitations issue, the retirement industry will likely be shaken to its core given the fact that the highest court in the land is going to address the issue of excessive fees in 401(k)s. Greater attention to fees by the powers that be could tip the scales even more in favor of cheaper retirement plan offerings.

“It depends on what the Supreme Court is going to do: Will they answer the questions of whether there’s a bright line with institutional versus retail funds,” said Marcia Wagner, a managing director of The Wagner Law Group. “If the Supreme Court says something that clearly, I think the entire industry will move in that direction.”

“I think you’ll see the larger plans, and even the small to midsized plans, going institutional,” Ms. Wagner said. “The salient issue for the Tibble case is that the same funds were available in both institutional and retail. What’s the difference that justifies the fees?”

Colorado Supreme Court Won’t Hear Lawsuit Seeking Release of Pension Data

Colorado Treasurer Walker Stapleton has for years pushed the state toward initiatives designed to improve the health of its pension system, and open pension data was a big part of Stapleton’s plans.

Back in 2011, Stapleton filed a lawsuit seeking the release of retirement benefit data for Colorado’s highest-earning pensioners. But the state’s pension fund, the Public Employees Retirement Association (PERA), said the information was confidential and refused to release it.

Since then, two lower courts have sided with the pension system on the issue. Stapleton appealed the rulings all the way to the state Supreme Court—but the Court announced today that they wouldn’t be hearing his case. From the Associated Press:

The Colorado Supreme Court has decided not to hear a lawsuit from state Treasurer Walker Stapleton seeking information about employee benefits in the state’s pension system.

Stapleton, a Republican, has sought non-identifying information about the top 20 percent of the pension’s beneficiaries and their annual retirement benefit. He says the information would help him to assess the health of the state pension’s program and how to keep it solvent.

Neither Stapleton nor the Court have released statements addressing the turn of events.

Last year, Stapleton convinced the Board of the PERA to lower its assumed rate of return from 8 percent to 7.5 percent. The Denver Post:

Colorado’s Public Employees’ Retirement Association voted 8-7 to lower its expected rate of return on investments to 7.5 percent, down from 8 percent.

State Treasurer Walker Stapleton has urged the board for three years to lower its rate of return, warning of an eventual collapse and bailout of the pension system for 300,000 teachers and state workers.

[The] vote means the pension fund’s unfunded liability will increase by about $6 billion to $29 billion, Stapleton estimated.

“In the short term, that’s not a good thing,” Stapleton said. “But it makes it all the more imperative that we find a way come together … and commit ourselves to fixing this problem sooner rather than later.”

The vote was a shift in philosophy from three years ago, when the board voted 10-5 to keep its rate of return at 8 percent.

The rate is used to predict investment growth over the next 30 years. Numerous economists have suggested a realistic expectation is 6.5 percent to 7.5 percent for state funds nationwide.

PERA’s average actual rate of return over the last decade has been over 8 percent. But over a different ten-year period—2001 through 2011—it returned only 3 percent annually on average.

Photo: “Denver capitol” by Hustvedt – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

The Lawsuit That Could Legalize Pay-To-Play For Pension Fund Investments

Here’s a scenario to chew on:

An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.

Does something seem fishy about that situation?

The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.

But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line.

The lawsuit, filed last week by Republican committees from New York and Tennessee against the SEC, wants the court to affirm that political donations are free speech—and, by extension, current SEC pay-to-play rules are unconstitutional.

Under the SEC’s current rules, investment advisors can’t make donations to politicians that have any influence—direct or indirect—over the hiring of investment firms.

In many states, it’s the job of the governor or mayor to appoint members to the state or city’s pension board—the entity that controls pension funds’ investment decisions.

The lawsuit claims that it’s not fair to make investment firm employees choose between their career and their First Amendment rights.

But does the lawsuit have a shot?

If past court decisions are any indication, it certainly has a fighting chance. David Frum writes:

It’s a good guess that the federal courts will listen sympathetically to the challenge to the SEC rule. The Supreme Court has made clear that campaign contributions are protected free speech, both for individuals and for corporations. While protecting against corruption remains a valid basis for restricting contributions, the Court has defined corruption narrowly: In the words of the majority opinion in McCutcheon v. FEC, the most recent major campaign-finance case, corruption is “an effort to control the exercise of an officeholder’s official duties.” And as Justice John Roberts wrote in FEC v. Wisconsin Right to Life, the courts “must err on the side of protecting political speech rather than suppressing it.” It seems very conceivable that the courts will find the SEC rule overly broad.

It should be noted, the SEC didn’t put these rules in place for no reason.

Over the course of a few years in the mid-2000’s, then-New York State Comptroller Alan Hevesi accepted over $1 million in campaign donations and gifts from investment firm Markstone Capital.

Hevesi, who at the time was the sole trustee of the New York State Common Retirement Fund, subsequently decided that the Fund should make a $250 million investment with Markstone.

Hevesi eventually pled guilty to corruption charges and served a little less than two years in prison. He is banned from holding public office again. The case was the catalyst for the pay-to-play rules the SEC currently has in place.

But Frum, in a piece written for the Atlantic today, wonders aloud whether the SEC rule targets the right people. Frum writes:

It’s a valid question whether the SEC rule is actually achieving anything.

The people with the most sway over state pension-funds decisions are not always—nor even often—elected officials. And those who exert the most effective influence over them are not always—nor even often—campaign contributors.

Frum points that it’s often placement agents who are helping to pull strings from behind the scenes. That’s been the case in California, Dallas, New Mexico and Kentucky, and those are just the high-profile ones.

From Frum:

In our belief that it’s politicians who are always and everywhere to blame for everything that goes wrong in a political system, we consign to the financial pages the abundant evidence that the most fundamental vulnerability of state pension plans to corrupt influence is located less in politicians’ need for campaign funds, and much more in the weak governance of state pension plans themselves.

As the New York Republicans’ case against the SEC winds its way through the courts, and if it begins to succeed, you’ll hear a lot of agitated discussion about what this all means for campaign finance, for Chris Christie, and for American elections. But the most important trouble—and the most disturbing practices—are located quite elsewhere. It will be worth keeping that in mind.

That doesn’t necessarily mean, however, that the SEC rule should be repealed and the floodgates opened.

It just means that the stuff happening behind closed doors—the opaque world of placement agents—is what we should be worried about, too.

Here’s a summary of current pay-to-play regulation:

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Photo by Truthout.org via Flickr CC License

Judge Throws Out Pension Funds’ Lawsuit Against JP Morgan

A lawsuit alleging that JP Morgan knew more than it let on about Bernie Madoff’s massive Ponzi scheme was dismissed yesterday by a judge, who said there wasn’t enough evidence that the bank’s board members breached their duty to shareholders by ignoring alleged “red flags” around Madoff’s fraudulent activities.

The suit was filed by two pension funds – the Steamfitters Local 449 Pension Fund in Pittsburgh and Central Laborers’ Pension Fund in Jacksonville, Illinois – that are both shareholders of JP Morgan.

Rhode Island pension reform could be scaled back with settlement proposal

Rhode Island has been entangled in legal battles since the state signed its sweeping pension reform bill into law in 2011. But a new proposal may bring an end to the legal challenges mounted against the law once and for all, and in the process soften some of the law’s strongest provisions.

The 2011 law, titled the Rhode Island Retirement Security Act, aimed to curb the state’s pension costs by $4 billion over 20 years. It did so by raising retirement ages for most workers, suspending COLAs for retirees, and shifting workers into a new 401(k)-type retirement plan.

The settlement would keep in place most of the 2011 law. But it would also bring some key changes, as outlined by the New Haven Register:

The settlement would give cost-of-living increases to retired government workers sooner than the current law would allow. It calls for a one-time 2 percent cost-of-living pension increase once the settlement is enacted by lawmakers. Additional increases would come in 2017, and every four years thereafter until the pension fund is 80 percent funded.

The existing law calls for limited increases every five years until the 80 percent funding level is reached. The fund is now about 60 percent funded.

The settlement would also call on public workers to contribute slightly more toward their own retirement benefits.

The proposed changed would cost Rhode Island $13 million and the state’s towns and cities $11 million, and would raise the state’s unfunded liabilities from $4.8 billion to $5 billion.

The proposal must now pass through a series of votes by union members, a judge in the state Superior Court, the systems retirees and finally by state lawmakers.

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