CalPERS’ Tainted Fiduciary Counsel Robert Klausner Departs After NC Publicizes His Dubious History

Last year, we wrote at length about how CalPERS had made a remarkably poor choice for its fiduciary counsel, arguably the fund’s most important outside advisor.

The board’s pick, Robert Klausner, has a decades-spanning record of improprieties, including running big-ticket pay-to-play conferences for his pension fund clients that touted pension consultants that were sanctioned by the SEC. He was also effectively fired by the City of San Diego in 1999, ostensibly for not being licensed in California, but a news story suggests the proximate cause was Klasner’s willingness to legitimate anything the pension wanted to do, such as raising the salary cap of the pension administrator by 10%. More recently, Klausner has been at the center of a fight between the City of Jacksonville and its fire and police pension fund, the result of extensive reporting by the Florida Times-Union which in turn led the city to hire forensic investigator Ted Siedle to dig further. Among other things, Klausner set up a secret pension fund for its executives only. Not only did it pay benefits so high (up to $200,000 per year in total) that put the total payments to the top executive over exceeded IRS limits, but it was also superfunded while the underlying pension fund was one of the most underfunded in the state.

In fairness to the board, CalPERS’ legal department, which did the screening of fiduciary counsel candidates, misled the board by withholding unfavorable information about Klausner, including the many press stories about his unsavory conduct. In the last month, a prominent reporter at a top mainstream media outlet privately called him “a world class con artist.”

Klaunser is out, despite having been less than two full years into a five-year contract with the giant public pension fund. CalPERS’ peculiar effort to minimize Klausner’s departure is consistent with the board forcing his departure. Here is the only official mention of Klausner’s exodus, courtesy the Pensions & Investments article CalPERS issues call for fiduciary counsel:

CalPERS is searching for a full-time fiduciary counsel, said spokesman Joe DeAnda in an e-mail…

The board’s current fiduciary attorney Robert Klausner consults with CalPERS on a case-by-case basis, but CalPERS wants a permanent fiduciary counsel, Mr. DeAnda said. Mr. Klausner is eligible to bid, Mr. DeAnda said.

It’s comical see CalPERS try to put a good face on Klausner’s exodus by saying he can bid on the very same contract that he just had, particularly since Klaunser quoted the lowest price per hour of the finalists (ie, his departure is highly unlikely to be about his bills being excessive).

Absent a tidy explanation as to why Klausner is being replaced, individuals with knowledge of CalPERS and public pension funds say it looks like he was pushed out. There is no sign he is cutting back on his practice, and documents we obtained from CalPERS show that Klausner was touting his assignment with CalPERS in pitching business to other public pension funds.

This conclusion is plausible given that some members of the board were dissatisfied with the information they were given at the time of the review of candidates in October 2014. Richard Costigan and Priya Mathur both objected to the elimination of detailed backup that had been given in the past. Later, the two lawyers on the board (Richard Costigan and Dana Hollinger), objected when when Klausner supported CalPERS’ staff in its indefensible efforts to deny board member JJ Jelincic information when he was forced to resort to a Public Records Act request (California’s FOIA) to get it.

In addition to our coverage of Klausner’s long record of shady conduct and legal advice, as well as bird-dogging his questionable opinions at board meetings, a big wake-up call came from California’s highly regarded First Amendment Coalition and the state’s top Public Records Act lawyer, Karl Olson, taking up our Public Records Act request on Klausner. We’ve attached the letters that Mr. Olson sent to CalPERS on behalf of the First Amendment Coalition; we helped draft both and sent them to all members of the board. I encourage you to read them in full. The priceless remark about henhouses in the second missive, on March 31, came from Mr. Olson.

This development is clearly positive, since it would be difficult to find an attorney as compromised as Klausner. Even so, its disturbing to see CalPERS not only be secretive, but to evade legally-mandated public disclosure requirements yet again. The board has to have discussed and approved a decision to launch a search for a new fiduciary counsel. While it is perfectly kosher for that discussion to take place privately, in closed session, it needs to be listed on the board agenda with statutory citations as to why the item is not required to be handled in public view. We see no such item in recent board agendas. That means the decision was taken in violation of the Bagley-Keene Open Meeting Act, a statue that CalPERS regularly flouts.

Independent observers also saw Klausner’s exodus as a step in the right direction. As one commentator who has written regularly on pensions noted:

For many year Robert Klausner has been offering public pension boards advice that raises serious questions about whether he’s serving them or himself first, or even acting legally. His departure from Calpers might indicate that pension boards are finally waking up.

But Andrew Silton, the former Chief Investment Officer for North Carolina, doubts that CalPERS is turning over a new leaf:

An investment organization can’t learn and improve if it doesn’t acknowledge its short-comings. CalPERS would have us believe the search for a new fiduciary counsel is just business as usual. However, anyone listening to meetings of the Investment Committee would have to acknowledge that CalPERS has struggled when it comes to delineating fiduciary responsibilities, and Mr. Klaunser seemed incapable of steering them in the right direction. In due course, CalPERS will have a new fiduciary counsel, but there’s a decent probability that nothing of substance will have changed at CalPERS.

Indeed, CalPERS’ defensiveness over Klausner’s exit suggests they’ve drawn the wrong lesson. Better to have some minor embarrassment for correcting this mistake than have Klausner persuade the board to sign off on self-serving moves by staff that could do the system far greater damage. The institution seems to believe its own PR even when it is unconvincing. That combined with an apparent inability to admit to and examine bad decisions means it is destined to keep making serious errors of judgment.

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Jacobs Letter- CALPERS – 3.8.16-2

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3.31.16 Letter to Ms. Evans and Mr. Gregory- CalPERS-1