California’s Fair Political Practices Commission says it will probe conflict-of-interest and disclosure complaints tied to former investment chief Ben Meng.
California officials said they opened an investigation into whether the former investment chief for the nation’s largest pension fund violated state conflict-of-interest laws by holding personal investments in private equity firms in which the fund is also an investor.
Several board members at the California Public Employees’ Retirement System, known as Calpers, are seeking more information about the circumstances surrounding the 5 August resignation of former investment chief Ben Meng, including when chief executive Marcie Frost learned about possible investment conflicts and what procedures the fund has in place to keep investment officials from running afoul of conflict-of-interest rules.
Calpers this month referred an internal review concerning Meng’s personal investments to California’s Fair Political Practices Commission, according to a person familiar with the matter. The commission said it received two formal complaints regarding Meng’s investments and his disclosure of them, and will investigate both. The commission investigates civil violations of laws concerning political campaign spending disclosures and public officials’ conflicts of interest and can levy fines of up to $5,000 per violation.
Meng’s abrupt exit sent shock waves through the pension fund, which has grappled with chronic turnover and has on hand only about 70% of assets needed to meet future pension promises.
Unlike his predecessors, Meng had investment experience on Wall Street. In his first full year, Calpers reversed a streak of underperformance relative to other large pension plans, earning 4.7% for the 12 months ended June 30 despite losses in the first quarter during the early days of the pandemic. Months before his departure, he had embarked on a push to address Calpers’s shortfall and hit the pension’s ambitious investment target by borrowing against the fund.
One focus of Calpers’s review, launched in April, was Meng’s personal ownership of Blackstone Group shares in 2019 during the period Calpers pledged $750m to a private equity fund managed by the firm, a person said. Meng disclosed between $10,001 and $100,000 of shares on forms submitted shortly after he became investment chief in January 2019 and in April of this year.
A Calpers spokesman declined to comment on any role Meng played in the pension fund’s Blackstone investment and on the commission’s investigation.
There is no evidence that Meng attempted to benefit personally from his work at Calpers. Public officials can run afoul of state law simply by participating in government decisions that create the appearance of a conflict of interest. Tom Byrne, who chaired the New Jersey State Investment Council between 2015 and 2018, said he left the room during discussions on Blackstone and recused himself from decisions involving the firm. The investment firm he runs held shares in Blackstone for clients around that time.
Calpers has faced pressure to avoid the appearance of impropriety ever since a bruising scandal in the 2000s that led Calpers’s former CEO to plead guilty to involvement in a bribery scheme. Calpers asks investment staff to disclose personal investments upon arriving and then annually for the previous year. Individuals take mandatory training on conflicts of interest, and officials have opted to recuse themselves on investments for a variety of reasons, people familiar with the pension’s practices said.
A Calpers spokesperson declined to say whether Meng’s initial disclosure of Blackstone shares, more than a month before the March 2019 Blackstone commitment, raised any flags for Calpers, or whether the fund took steps to protect him from running afoul of conflict-of-interest rules.
Meng said at the start of his tenure that he intended to expand Calpers’s private equity portfolio, a longstanding Calpers goal as the fund seeks to earn annual returns of 7% in an era of low interest rates. Blackstone ranks among the largest private equity managers.
Calpers didn’t flag any problems with Meng holding Blackstone shares until 2020, a person familiar with the matter said, and he subsequently sold the stock.
Institutions can help prevent problems by monitoring investments, pre-screening decisions and flagging potential conflicts for officials in real time, experts said. “If you’re going to say [officials] can continue to own stock, proactively be involved,” said Robert Rizzi, a partner with the law firm Steptoe & Johnson who teaches government ethics at Harvard Law School. “Otherwise you’re just creating a trap for the unwary”.
A 2 August post on the blog Naked Capitalism called attention to Meng’s disclosures. In the following days, Calpers referred its internal findings to the state, according to a person familiar with the matter. A Calpers spokesman said that action wasn’t prompted by the blogger.
Several board members are questioning the way Calpers has handled the issue.
State controller Betty Yee called for a review of Calpers’s conflict-of-interest policies, “the CEO’s oversight and implementation of these policies, and any additional safeguards necessary to ensure this does not happen again”.
Board chairman Henry Jones said, “Our CEO advised me of this issue when she became aware of it. It had been scheduled to be brought to the Board upon completion of the investigation.” He previously said the issues over Meng’s investments are “private personnel matters and already have been addressed according to our internal compliance protocols.”
Calper’s CEO Frost said in a statement that the pension fund plans to propose policy changes at the board’s September meeting, but the statement didn’t say what they would be. “We are committed to strong compliance protocols,” she said.
People close to Meng said that even before the internal review the investment chief was worn down by the public spotlight. Meng came to Calpers from a job as deputy chief investment officer of China’s State Administration of Foreign Exchange, the agency in charge of the country’s more than $3tn in foreign reserves. Before that he worked at Calpers from 2008 to 2015 and had stints at Morgan Stanley as well as Barclays Global Investors. Meng is from China and became a US citizen.
As US-China ties soured, Meng’s past role with China’s State Administration of Foreign Exchange prompted some Washington politicians to call attention to Calpers’s Chinese investments.
Meng confided to acquaintances that he was troubled by that mounting scrutiny, associates said. After the conflict-of-interest questions became public, Meng decided to resign rather than deal with another controversy, people familiar with the matter said. “It’s important for me to focus on my health and on my family,” Meng said in a statement, “and move on to the next chapter in my life.”
On a call with investment staff this month, interim investment chief Dan Bienvenue said Calpers would continue with its investment plan. Calpers hopes to find a replacement who is also an experienced investor, said a person familiar with Calpers’s plans.
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