FBI and SEC investigations cost Pennsylvania’s largest pension fund $4 million last year

The PSERS investigations have cost the teachers’ pension plan $4.5 million in legal and adviser fees since March 2021, state records show.

That’s enough to pay 170 retirees the average pension of $26,000 for one year. The system invests $75 billion for half a million active and retired members, costing taxpayers $5 billion a year, and another $1 billion from school payroll deductions. Profits from investments also contribute to the PSERS.

Bills are piling up as administrators of the system, known as the Public School Employees Retirement System, face two federal investigations and try to chart a new direction after senior staff left in recent months .

The directors elected in March the Secretary of State for Banking, Richard Vague, to head the board’s investment committee. State Rep. Matt Bradford (D., Montgomery) will lead the governance committee tasked with making the agency more responsive to its own directors.

Waver and state treasurer Stacy Garrity was among board members who blamed the plan’s lagging returns, relative to other state pension plans, on its policy of buying too many underperforming hedge funds, and not enough low-priced US stocks or index funds, over the long run. bull market that started in 2009.

They had also called for the ousting of PSERS executive director Glen Grell and chief investment officer James H. Grossman Jr., who both agreed to leave last year, as did Grossman’s deputy Charles Spiller and l Chief Counsel Jackie Wiess Lutz. A committee appointed by council chairman Chris Santa Maria, a Lower Merion history teacher, and led by Sue Lemmo, an art teacher from Curwensville, north of Altoona, is looking for replacements.

And still ongoing, the two federal investigations:

– U.S. prosecutors in Philadelphia investigated the system’s exaggerated investment returns for 2011-2020, leading PSERS to reverse course and collect higher pension contributions from 100,000 mostly younger teachers . The federal government is also reviewing a series of land purchase decisions in Harrisburg, which an internal review found were not shared by fund managers with trustees.

– The U.S. Securities and Exchange Commission is also investigating miscalculations and possible conflicts of interest arising from trips and other gifts given to PSERS staff by some of its dozens of Wall Street investment contractors.

To deal with these investigations and related matters, the PSERS during the year ended March 31 paid:

– $1.89 million to Philadelphia law firm Morgan Lewis and Bockius, which advised PSERS on its response to federal investigations;

– $1.08 million to Seattle-based Verus Advisory Inc., hired to recommend investments and review PSERS procedures while staff handled investigations;

– $575,300 to the New York law firm Pillsbury Winthrop Shaw Pittman, which is representing the PSERS board in federal investigations.

While advising the agency, attorneys for Morgan Lewis and Pillsbury also attempted to derail a lawsuit filed by PSERS board member and State Sen. Katie Muth (D., Montgomery) , who argues that as a fiduciary, she should have access to investigation records and the PSERS. secret contracts with Wall Street firms that collect over half a billion dollars a year in PSERS fees.

A Commonwealth Court panel has rejected all of the fund’s defense arguments and is accelerating the trial. “Pillsbury completely lost the first round,” as Vague said in a meeting with the trustees last month, adding that he felt the board should settle with Muth.

“There is no advantage” for PSERS members to pursue the case, since the judges decided that Muth was in fact “authorized” to receive the files she seeks, agreed Christopher Craig, an aide to the State Treasurer Garrity.

On Monday, the board voted to hire another law firm, Post & Schell, as it prepares to file its response to Muth’s lawsuit, which is due April 15. That firm replaces Pillsbury as counsel to the PSERS board and President Santa Maria, according to PSERS spokeswoman Evelyn Williams. Morgan Lewis now represents PSERS and its former executive director Grell. Williams declined to comment on why Pillsbury no longer represents the PSERS.

Is the PSERS ready to give the documents to Muth and the other administrators? “We have a response in court next week,” PSERS’ Williams said, declining to comment on the agency’s plans until then.

Other payments include:

– $588,500 to Womble Bond Dickinson, a UK and US law firm that wrote an internal report examining the issues that sparked the federal prosecutors’ investigation, but did not assign blame.

– $182,700 to Kleinbard LLC, a Philadelphia company that represented Grossman, the former chief investment officer of PSERS, in the investigations.

PSERS’ bylaws allow the agency to spend up to $40 million a year to defend or advise staff in response to civil or criminal investigations. The PSERS said eight employees were represented by lawyers in the investigations.

If found guilty of crimes, staff are expected to repay the funds. No one has been charged with wrongdoing.

– $181,200 to Pietragallo, Gordon, Alfano, Bosick and Raspanti, a Philadelphia firm representing former chief executive Grell in the investigations;

– $48,300 to Saul Ewing Remick & Saul, a Philadelphia firm that also represented PSERS personnel in the investigations.

The board also agreed to pay $16,000 to Lewis Brisbois Bisgaard & Smith, a Wilmington firm that advised PSERS staff in March 2021 after receiving grand jury subpoenas.

And in February, the board agreed to hire Blank Rome of Philadelphia to represent it in a Philadelphia Common Pleas lawsuit brought by Kevin Steinke, a Delaware County teacher, against two of the elite financial services providers. PSERS, Aon Investments USA, Chicago and Hamilton. Lane Advisors, of Conshohocken.

Aon prepared information used by PSERS in its erroneous earnings report; Conshohocken-based Hamilton Lane has recommended numerous private equity and hedge fund investments purchased by PSERS. Both companies dispute the lawsuit’s allegations.

Vague, the new chairman of the investment committee, was one of the board members who pushed PSERS to reduce its focus on costly alternative investments.

But that can be difficult to achieve. Some of his hedge fund investments are now publicly traded and are technically “public stocks.”

For example, PSERS’ annual list of the 10 largest “public equity” investments shows that one is a London-based hedge fund, two are invested primarily in Chinese stocks, another focuses on high-grade Japanese bonds. risk and another is a private equity investment. solidify. .

Another question is whether the reformers will be around long enough to make substantial changes to the investment direction of the 15-member council. Vague, former State Treasurer Joe Torsella and Secretary of Education Noe Ortega are appointed by Gov. Tom Wolf, who steps down in January. Their replacements will be appointed by Wolf’s successor.

State Representative Frank X. Ryan (R., Lebanon), who has criticized PSERS’ high-cost investments but refrained from demanding the ousting of leaders, is also expected to leave office in January.

Dolores W. Simon