Calif. pension plan sued over fee data

Media organization targets CalPERS funds

September 08, 2004|By BLOOMBERG NEWS

SAN FRANCISCO - The California Public Employees' Retirement System, the largest U.S. public pension plan, with $166 billion of assets, was sued yesterday for failing to disclose the fees it pays managers of venture capital and hedge funds.

Taxpayers and state workers who depend on CalPERS for their retirement have a right to a breakdown of costs that amount to about $500 million a year, according to the suit filed by the California First Amendment Coalition in a state court in San Francisco.

Disclosing the fees will help ensure CalPERS isn't overpaying for poor performance and isn't rewarding managers who make political donations to members of its board, according to the suit, which was confirmed by Peter Scheer, the coalition's executive director.

"Only through that kind of transparency can the public hold CalPERS accountable," said the suit from the San Rafael, Calif.-based coalition, founded in 1988 by media organizations to increase public access to government records and proceedings. "The danger of CalPERS operating in secrecy is manifest when one considers the staggering sums of money involved."

Brad Pacheco, a CalPERS spokesman, declined to comment immediately, saying he hasn't seen the lawsuit.

The coalition is being represented by Karl Olson of Levy Ram & Olson, who successfully represented the San Jose Mercury News when it sued CalPERS in 2002 for information on returns from private equity investments. Olson also represented a labor union that succeeded last year in forcing the University of California to reveal similar returns.

Money managers in the United States are under increasing pressure to lower the fees that they charge investors. New York Attorney General Eliot Spitzer has forced firms such as Alliance Capital Management Holding LP to make fee cuts to settle allegations that they allowed favored clients to engage in trading that lowered the returns of long-term mutual fund holders.

CalPERS, ironically, also has been involved in holding corporate toes to the fire by pressuring companies on governance issues and recommending withholding of votes from some board members at annual meetings of companies in which it has investments.

The lawsuit also emerges as state pension funds, including CalPERS, are being required to publish the returns recorded by venture capital managers. CalPERS has declined requests for information about fees, Scheer said in a telephone interview.

The coalition, whose founders include the California Newspaper Publishers Association and Society of Professional Journalists, says it works to resist claims by government agencies for more secrecy and privacy, according to its Web site.

The group has endorsed the adoption of a so-called sunshine amendment in the California constitution that would enshrine the public's right to know about state government. The amendment is scheduled for a vote in November.

Patricia Burgess, CalPERS' assistant chief counsel, wrote to Scheer on June 14, saying that fund costs were a trade secret, the suit alleges. The information that CalPERS calls a trade secret is well known, the suit alleges.

Fees in the venture capital and hedge fund business are fairly standard: 2 percent to 2.5 percent of committed capital plus 20 percent of profits for venture firms, and 1 percent to 2 percent of capital plus 20 percent of profits for hedge fund managers. "If VC fund management fees are confidential, they are certainly among the financial community's worst-kept secrets," the suit says.

Management fees became a point of contention between venture capital funds and investors starting in 2001. Firms that had raised record funds of $1 billion or more during the Internet boom halted investments after the stock market slumped, and they still charged annual management fees that in some cases amounted to about $20 million. Investors protested, prompting firms such as Accel Partners and Battery Ventures to lower their fees starting in 2002.

A failure to disclose information on fees prevents funds from competing on price, the suit says.

CalPERS was created by state law in 1932 to provide pensions for state employees. Today, it manages retirement and health benefits for more than 1.4 million workers and retirees.

The pension plan, managed from Sacramento, has pledged about $20.3 billion to about 364 so-called alternative investment funds, according to its Web site. The market value of its alternative assets was $8 billion, or about 5 percent of the pension plan's total assets of $166.3 billion on June 30.

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