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Financial outsourcing is hardly limited to the University of California. With roughly $6 trillion in assets at stake, public pension fund management and consulting is among the most lucrative corners of the financial services industry. It's also one of the least regulated. In 2005, the Securities and Exchange Commission wrapped up an eighteen-month probe of 24 pension and 401(k) fund consultants. Nearly four in five, the SEC reported, had financial relationships with the money managers they were recommending to their pension clients, even as most of the consultants purported to provide impartial references. Sometimes they sold software to the money management firms The New York Times reported that some money managers viewed the purchases as simply a way to ensure that their services were recommended to pension fund trustees. The SEC also found evidence of kickbacks: Some consultants sought out managers willing to route the stock trades back to the consultant's brokerage wing. According to The Los Angeles Times, Wilshire, one of the companies surveyed, received a letter from the SEC "suggesting the firm improve its disclosure."
Might Wilshire have recommended managers who in turn hired it to broker the trades? That's difficult to assess, since university officials swear they don't know who pocketed the millions in brokerage commissions they have paid out since 2002. "The treasurer's office tracked commissions when these assets were managed internally," spokesman Trey Davis wrote in an e-mail. "They are not tracked now; rather, the commissions are just netted against transaction costs."
Former SEC lawyer Siedle isn't buying it. "That's horseshit," he countered. "The university knows exactly who got paid to do what. They have to by law. A fiduciary is charged with monitoring costs. One of the most significant costs of running a pension plan are brokerage commissions. They're lying to you about that. And if they're not, they're really fucking up."
When asked again to review its brokerage commissions, university officials did not provide any further information.
Indeed, it seems as if the worse the pension fund does, the less willing the university is to tell the public. For example, comparisons of the fund's performance versus similar pension plans and investment trusts were once a regular feature of the treasurer's annual reports. But as fund performance began to go south, the regents and the treasurer's office became reluctant to compare it with its peers. At an investment committee meeting on May 15, 2002, Parsky noted that the committee "had urged that the regents not pay close attention to the university's peer institutions, which tend to have very different investment profiles." By 2005, the regents' new pension consultant had delivered a lengthy report arguing that such comparisons were useless: "They appeal to the 'horse-race' mentality in the investment community."
Last January, Charles Schwartz, an emeritus physics professor from UC Berkeley, was the first to publicly note that the university's bank had listed the pension fund among the nation's lowest performers. When UC officials gave him the data after repeated Public Records Act requests, they were careful to state that "The treasurer's office has moved away from peer group comparisons."
According to Schwartz, this was just part of a long-standing pattern of obfuscation on UC's part. For the past seven years, this retired professor has obsessively catalogued the fund's performance and analyzed every report by Wilshire and the treasurer's office, pointing out what he claims are critical flaws in the consultant's risk analysis and demanding the minutes to secret regents' meetings.
The regents, many of whom are investment and business professionals, dismissed Schwartz as a gadfly. After all, he has complained publicly for decades about the board's lack of accountability. In the early 1990s, as a state budget crisis drove up UC student fees, Schwartz started a campaign to "democratize" the regents, whom the governor appoints to twelve-year terms. His effort flopped, and the professor set out to enjoy his retirement. But when Schwartz began reading news accounts of Small's ouster, something didn't feel right. Thus began his long campaign to analyze every financial report and catalogue every conflict-of-interest allegation against Wilshire.
Schwartz is no investment expert, but he is a physicist who knows his numbers. To him, Wilshire's pension-fund analysis reads like mathematical nonsense. "A key part of their report was making projections of future performance on the investments," he said. "Any such projections must involve a lot of uncertainties. And in the Wilshire report it was just ignored. The numbers were just put down as if they were absolutely reliable.
"About a year later, I discovered that the numbers were just plain wrong," Schwartz said. "After some correspondence, it was admitted that yes, they made a mistake."
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