Corruption at CalPERS: General Counsel Matt Jacobs as Exemplar of Culture of Casual Lying

We are going to start on an occasional series of posts on the regular, verifiable lies told by CalPERS’ general counsel Matt Jacobs to its board and the general public. This isn’t the first time we’ve written about Jacobs’ misrepresentations, but we now have a significant backlog of incidents. It has become important to document his reckless conduct, since his “win at all costs” approach is bad for CalPERS and the reputation of public pension funds generally.

The reason this matters is that former general counsel and now law professor Bill Black characterized CalPERS as having a “corrupt culture” that senior officers and the board are refusing to address. In a previous post, Black laid out how Jacobs undermined good governance and proper execution of CalPERS’ fiduciary duties by throwing his weight behing a witch hunt against CalPERS’ lone effective board member, JJ Jelincic.

While the CEO, Marcie Frost, is ultimately responsible for the failures of staff performance, Jacobs nevertheless merits special attention. The general counsel is one of the most important control and compliance officers in any organization. “Control and compliance” are even more important in an government agency controlling hundreds of billions of dollars with no oversight save that of a board that we have repeatedly shown to be timid, wanting in skills, and deeply captured. Jacobs’ “anything goes,” example is dangerous to an organization with a fiduciary duty to beneficiaries, let alone one plagued by scandal.

We’ll focus on Jacobs’ lies of commission, but it is important to include lies of omission, such as failing to inform the Board of the tainted record of Robert Klausner. He was fiduciary counsel candidate that was the staff’s top choice during the 2014 selection process. A simple Google search showed numerous media stories, including ones in Forbes and the New York Times, discussing Klausner’s dodgy practices, such as sponsoring pay-to-play conferences. That is the last sort of thing you want to see in a fiduciary counsel. Yet not only did Jacobs withhold that information, but he also denied the board materials that it had received in past fiduciary counsel screenings.

To keep this post manageable, we’ll remind readers of a past incident and then cover a newer one in which the footprints strongly suggest that Jacobs putting his finger on the scale. Not only did he brief the board even more poorly than in 2014, but he also appears to have gotten a board designee to misrepresent the qualifications of a candidate to justify not considering them when the two finalists fell short on a key issue.

Jacobs’ Repeated Misrepresentations Over the Public’s Right to Speak

The public is effectively shut out from having any influence at CalPERS. Even though the Bagley-Keene Open Meeting Act has lofty language about citizens’ right to participate in public decisions, in practice, that means only a right to comment in public meetings right before a vote is taken. As most politically-savvy people know, that is too little and to late to amount to a real say.

CalPERS restricted public input further by imposing a strict three-minute maximum on public comments, shutting off the microphone when the time limit is reached. The agency did so even though it had not taken the required legal steps to impose any restriction. CalPERS continued to impose an illegal time limit after we and others first raised the issue after a November 2015 board meeting when we were impermissibly cut off. We objected forcefully in Sacramento in August 2016 when we were again silenced. Jacobs then made an astonishing and deliberate misreading of clear statutory language (arguing that “shall” which means action is required, is the same as “may,” which means optional).

To make a long story short, we continued to press the issue. Jacobs finally recognized his position was not tenable and started the process of creating a regulation. But as UC Berkley visiting scholar Michael Flaherman told the board in another public comment session, Jacobs again misled the board by telling them that CalPERS had always had a three-minute limit on comments. From our post CalPERS General Counsel Matt Jacobs Lies to Board, and Staff Abuses Authority, to Stymie Public Input. The relevant section starts at 19:55, or you can watch it here:

Bill Slaton, Chairman, Governance Committee: First, Mr. Flaherman and the fact that we don’t have a regulation, still, the limit is three minutes and there is a red, green and yellow light up here that you will be able to see.

Michael Flaherman, Visiting Scholar, UC Berkeley: Good afternoon. I’m Michael Flaherman. I’m a visiting scholar at UC Berkeley. I was a member of this board from 1995 to 2003. Mr. Chairman, respectfully I would ask for you to waive the three minute limit.

Slaton: Uh, we have…It’s eight minutes to 3:00, we have three speakers here, we have another meeting following this.

Flaherman: I don’t intend to speak for an extended period of time. The issue is that the Board has never taken any action whatsoever to enshrine the three minute limit in policy. We are not even talking about regulation…in policy…

Slaton: That’s part of your argument. I understand that. I tell you what, I’m going to do. We have three speakers and unless there’s serious objection I’m gonna allow four minutes each. Without objection that’s what we will do so you now have, we will reset the clock, you have four minutes.

Flaherman: I’m sorry, to be so procedurally a stickler here. I would ask as a courtesy that you would have the minutes note my objection to the imposition of a limit.

Slaton: We’re recording the meeting.

Flaherman: Could the minutes note that?

Slaton: We have a recorder, so the recorder is…

Flaherman: You won’t order the minutes to reflect that.

Slaton: The minutes are gonna be as they’re spoken.

Flarerman: No, that’s not true, that’s not how they are composed and you and I both know that.

Look, look, here’s the issue, here’s the issue, which is that [background conversation] page two of the agenda item says that there is a three-minute policy and that in the past there was a two-minute policy.

There is no three-minute policy. This board has never acted – and I’ve not talking about regulation but even just even as internal matter of policy the Board has never acted to impose any kind of policy.

What happened was that in May of 2012, your staff started printing on the agendas that there was a three minute time limit. That just happened.

Now I thought you guys were in charge. I thought you guys were in charge, but I hear Mr. Jacobs talking about this as a decision that we made and when he’s using the royal “we,” it’s not really clear whether he is talking about we the staff or you. Does anybody here want to raise their hands and say they were involved in the decision to impose a three minute time limit?

[Board President Robert Feckner raises his hand].

Flaherman: OK. So was made by the board president and you. OK, well, that’s very helpful. But again there was no action of the Board. Right? So yet this is held out as a policy.

Now even further still we have a statement from your legal staff that previously there was a two-minute time limit. Now I have the circular letters going back to 2004. I have one from every year and I would like to have this conveyed to the chair….could I have this conveyed to the chair? I’ll walk over.

So you will see that on these circular letters that there was never any note of any of any kind before May of 2012. So the statement that you guys are being generous by giving a three-minute time limit because you used to me much tougher and enforce a two-minute time limit that simply not true. It’s not true.

So here’s the bottom line. We all read the New York Times on Sunday and you guys are getting raked across the coals, a very unfair article written by Mary Walsh, a woman who has been generous over a period of decades. I knew her 1997 or something, right, in her coverage of this pension system and she’s not your friend anymore. And who appears in the article? Bill Sharpe, a man who I thought was your friend. He was your consultant for decades and he is ripping you over the coals.

You guys need friends and you’re losing them day by day. The system is dying day by day because the people who are your friends are not standing up for them.

And when you cut them off with glee, I mean the fire in the eye that I have seen in some of you in cutting people off at the stroke of three minutes is really just sad. It’s just sad. And your staff, you know, your staff has left out a lot of things. I found an attorney general opinion 92-2-12 where the Attorney General is opining with respect to the Brown Act, but Mr. Jacob acknowledges it’s the basically the same thing [as the Bagley-Keene Act], that inherently under the law, the chair of a meeting has the ability to cut off anyone who’s repetitious or vexatious…

Slaton: Please complete your thought because your time has expired.

Flaherman: So really that was how the system operated for decades and for decades there was no time limit, people that were your trusted friends came and gave your thoughts and you have the authority to do whatever you want to people who really caused trouble and I would urge you to reject this entire idea. Thank you.

Understand what happened here. Matt Jacobs through his documents and statements told the board that:

CalPERS had always had time limits on speakers when it had no limits whatsoever before 2012

The time limit had once been two minutes when that had never been the case

The time limits were board policy when they had never been a policy; staff had foisted then on the board by simply informing the board president

Moreover:

Jacobs and the board have taken the position that limiting comments is necessary and desirable, yet during the entire time this issue has been in play, no one has been able to cite a single instance where CalPERS’ board has been burdened by overly long comments

The board has ample authority under the law, without needing to impose a formal limit, to curb speakers who filibuster or otherwise become troublesome

Jacobs has given no consideration to the fact that many of the issues that CalPERS deals with are complex, and an adequate presentation may take more than three minutes. That was the case when I attempted to explain to the board in the private equity workshop last fall how a presentation on private equity returns gamed the numbers so as to make private equity appear far less risky that it was. I could tell from the glazed looks in most audience members’ eyes that they were not able to absorb the information. Tt needed to be unpacked further, but that would have taken more than the allotted time. This limit can therefore have the effect of depriving the board of crucial information useful or even necessary to execute its fiduciary duty.

Back to the current post. While this may seem a bit technical to some readers, attention to legal details is crucial to CalPERS’ both as a steward of hundreds of billions of dollars with a California taxpayer backstop and as a government agency. If Jacobs isn’t willing to dot “i”s and cross “t”s, he shouldn’t be in this job.

Jacobs’ Deceit in March 2017 Fiduciary Counsel Selection

After the scandal-ridden fiduciary counsel we mentioned above, Robert Klausner, resigned abruptly, apparently as a result of our publicizing his history and current scandals, the board needed to engage a new fiduciary counsel. Bear in mind that the fiduciary counsel in theory reports primarily to the board. Yet it delegates most of the screening process to staff. In past selection processes, the board has sometimes chosen a fiduciary counsel that had not gotten the highest score from staff but the board overrode the recommendation based on the finalist interviews. So restricting who gets in front of the board is one way to influence outcomes.

In the 2014 selection process, the first in which Jacobs was involved, the board demonstrated some independence, insisting on adding one firm to the finalist interviews to the two staff had selected.¹ The full board nevertheless wound up selecting the staff’s top choice, Klausner, with resulting public embarrassment.

This time, Jacobs was apparently more determined to control the process. Fewer people were involved in the selection of finalists, which would give the legal department more influence over who (and how many) made to the final round of full board review and interviews. That is not pretty but it isn’t going over any lines.

However, in reviewing how the two finalists were selected, Jacobs misrepresented what had taken place in a board document:

In early November 2016, the Board President and another Board Member selected by the Board President (Controller Yee) met with Legal Office staff to review and evaluate the proposals.

The two elected state officials who sit on CalPERS’ bord, the Treasurer and Controller, have more clout than the other board members. So representing that Yee was involved signifies a board member with external stature signed off on the picks. However, Yee is relatively new to CalPERS and has not previously participated in choosing the fiduciary counsel.

Yet we learn at the finalist interviews that it was not Yee that was at that meeting, but one of her delegates.

This matters due to a controversy involving one of the two finalists, Ashley Dunning of Noosaman, LLP. She had also been chosen by Jacobs to serve as CalPERS’ interim fiduciary counsel after Klaunser resigned.

We posted last month on yet another Jacobs lie of omission, that Dunning was representing Marin County in a landmark case that could undermine all California public pensions. As we wrote:

This ruling threatens the pensions of all California public employees, including members of CalPERS and CalSTRS. The case is set to go to the Supreme Court and a number of groups have objected fiercely to the court’s legal reasoning. CalSTRS’ general counsel Brian Bartow weighed in against the decision promptly after the ruling was issued, in October 2016.

The ruling endangers the so-called California rule that guarantees that employee benefit commitments will be honored. Any changes must confer an equivalent monetary benefit. In layperson speak, that means not cutting pension benefits unless the plan member gets proper compensation.

JJ Jelincic was not happy about either of the two finalists due to their position on the California rule.

Here is the section of the meeting where the board members discuss the candidates. Jelincic begins at 2:16:

Part of my frustration with this whole process is we got this list today, and had not had a chance to actually do any kind of due diligence or research on them. The guidance we got from staff I didn’t think had offered any real evaluative type material. This is the strengths, this is the weaknesses. When we went through this drill two years ago, that…those same kind of issues came up. So …you know, so I’ve got that basic disappointment.

Understand what Jelincic is saying. The board received only limited material, even less than they received in the past, with no time to study it since the board was in session all day the previous two days.

What is Jacobs’ excuse? The proposals were in ages ago. The screening process took place last November, meaning months before this board session in mid March. The inexcusably late delivery of materials looks like a big middle finger to the board. It was either by design, to make sure the board couldn’t digest the information, which would help stymie complaints about getting thin briefings, or not bothering to get work for the board done on time. Mind you, in the now three years I have been watching board meetings, the extensive materials provided by staff and experts and staff were always posted on time, ten days before the meetings started.

Jelincic continues:

You know, we’ve got two firms in front of us. And I, quite frankly, don’t find either acceptable. One flat out says we don’t support the California rule, and the other says, well, we didn’t mean to attack the 0 California rule, but we wont let that victory go.

What we learn a few minutes later was that it was not Yee but her designee, Karen Greene Ross, that screened the firms that responded to the request for proposal.

She makes a misrepresentation that it seems unlikely to have originated with her, starting in the video above at 10:25:

So just sort of agreeing with Richard, Bill Slaton, and Richard Gillihan, but I also wanted to just point out having worked with Rob [Feckner] and Matt [Jacobs] in looking at the other options, and while there was maybe one other that maybe qualified, they were not qualified, and we didn’t bring them, suggest bringing them forward, because again the Board had delegated this to a committee, which is why you guys weren’t all part of this process. We could bring any of them back, but you’re going to see firms that have taken sort of that similar ERISA practice in other states and/or other sort of litigation work that they think…they could figure out how to do this work, but they’re not in this world. And I do think that these two were as good as it could get for the criteria that were laid out.

Historically, for this pension fund on what you prefer, somebody based in California, and hopefully has a lot of public pension work. So while there were several firms, it was just few and far of them met the specific criteria.

It is not true that CalPERS “historically” preferred a California attorney. Klausner was the top pick last time and he was licensed in Florida. One of CalPERS’ previous fiduciary counsels was licensed in Wisconsin. The only reason this became an issue was that we made an issue of it with respect to Klausner.

But second, it is simply false for Green Ross to say that none of the other candidates had a real pension practice. The firm ReedSmith responded to the request for proposal. Not only was it was one of the two finalists chosen by staff last time, but it has been a fiduciary co-counsel to CalPERS! This is from the 2014 bio presented to the board in 2014. The attorney, Harvey Leiderman, is still with the firm:

Mr. Leiderman advises pension fund trustees, public companies, financial institutions, and private investors in resolving complex disputes involving fiduciary responsibilities. Hecurrently serves as fiduciary, investment and litigation counsel to some of the largest public pension funds in California, including CalPERS, CalSIRS, the boards of the retirement systems of Alameda, Contra Costa, Fresno, Orange, Stanislaus and Santa Barbara Counties and two systems for each of the Cities of Los Angeles and San Jose.

Mr. Leiderman and his team have served CalPERS as outside fiduciary counsel and litigation counsel for over six years. During the period he has served as counsel for CalPERS, he helped guide the Board and Executive Staff through a series of unique fiduciary and public policy challenges affecting investment, vested benefits, and personnel matters. For CalPERS and multiple county systems, Mr. Leiderman has defended challenges to the exercise of their trustees’ fiduciary duties under Proposition 162 and other applicable trust laws in establishing sound, actuarial-based contribution rates, retiree benefits and the use of “excess earnings.” As an experienced first-chair trial lawyer, he provides important perspective to his board clients.

In other words, it is simply absurd to say there was no qualified third candidate. ReedSmith was one of CalPERS’ two fiduciary counsels through 2014. I have heard nothing to suggest there was a performance issue with them; the reason for picking Klausner appears to have been the legal department ranking, and that may have been due to their much higher billing rate. Klausner made his real money on his pay to play operations and so could afford to underprice his billed work.

Greene Ross has a law degree and legal experience. She is certainly capable of reading a bio. It is hard to imagine that anyone operating with any independence could say ReedSmith was not qualified to do public pension work.

Let us not forget that it was Jacobs who had selected Ashley Dunning as interim fiduciary counsel, a signal she was his clear choice. It does not seem much of a stretch to infer that the reason for keeping a qualified firm, ReedSmith, away from the board was either a desire to skew the decision process or bureaucratic laziness, to process two rather than three finalists. Neither possibility reflects well on Jacobs.

And we can see how this sort of corruption spreads. Greene Ross somehow felt compelled to defend a slipshod process that did not serve the board well. Even if Dunning really was the best candidate, and she does appear to be a well-regarded and hardworking attorney, her selection is now tainted by Jacobs failing to run a sufficiently transparent and honest process a second time.

The reason this matters is staff works for the board, although CalPERS’ senior officers have done a great job of getting the board to think the reverse. A board cannot make good decisions if staff is lying to them and withholding information. The stakes are even greater for an an institution held to a fiduciary standard of conduct that the press watches closely. Someone in Jacobs’ position needs to be scrupulous in dealing with the board. The fact that he plays fast and loose with them on such a regular basis shows how much he holds them, CalPERS beneficiaries, and California taxpayers in contempt.

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¹ Notice that the process for initial screening of candidates changed from 2014. Even though staff played a bigger role, it also looked to have been more thorough, and may have reflected the fact that the former CEO Anne Stausboll was an attorney and recognized how much influence fiduciary counsel has over the board. From a 2014 board briefing on the fiduciary counsel interviews:

CalPERS’ staff evaluated the proposals and interviewed five of the submitting firms. The interview panel consisted of the Chief Executive Officer, Chief Financial Officer, General Counsel, Deputy General Counsel and Senior Investment Officer for Real Estate.

At the conclusion of the interviews, the panel evaluated the five firms based on their proposals, interviews and reference checks against the criteria included in the Solicitation.

As indicated, this time, the board background document states only that board members Feckner, Yee, and “members of the legal office staff to review the proposals, and no interviews were conducted. This appears at least in part to have board members involved earlier so if there is another Klausner-type fiasco, the legal department will be less exposed.

A case can be made for Yee sending Greene Ross in her stead, given that Yee is not a lawyer, while not only is Greene Ross a law school graduate but she also served in legal roles at the California High Speed Rail Authority, with her last position as Assistant General Counsel. However, it also shows that Yee does not appreciate the power of the fiduciary counsel role. And she may not have recognized that Greene Ross, as a former member of CalPERS’ investment department, as well as having operated as part of the legal department in another agency, might by unduly receptive to staff views.