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Cypen & Cypen
JUNE11, 2009

Stephen H. Cypen, Esq., Editor


We recently advised that California Public Employees’ Retirement System had adopted a Statement of Policy for Disclosure of Placement Agent Fees (see C&C Newsletter for May 14, 2009, Item 5).  We have now modified CalPERS’s policy for consideration by our Florida pension board clients.  The proposed policy can be accessed at  We would be pleased to answer any questions raised by said proposal. 


The United States Securities and Exchange Commission plans to propose that companies disclose in general terms how they compensate lower-ranking employees, expanding disclosures for the first time beyond the executive suite.  The Wall Street Journal reports that the proposal is part of a review of executive-pay policies at SEC and other agencies addressing practices that many believe led financial companies to take on too much risk.  SEC also may require companies to explain their ties to compensation consultants who often negotiate lavish pay packages for top executives.  During congressional testimony, SEC Chairman Mary Schapiro said the rules could be taken up as early as next month, after which they would go through a public-comment period and require final approval by the agency.  Currently, companies are required to explain executive-pay plans for only their five highest-paid executives.  Financial firms, movie studios, pharmaceutical companies and others often have superstar traders, producers or salespeople who are paid more than executives.  The proposal would not require companies to say how much they pay these star performers, but they would have to disclose in more-general terms how lower-ranking employees are paid, especially when it affects the company’s overall risk management.  It would apply in particular to financial firms, where traders have received big bonuses for executing trades that put the entire company in danger.  In 2006, SEC sought to require companies to disclose compensation of highly-paid nonexecutives.  However, industries successfully pushed back, saying that information was akin to a trade secret and disclosing it would allow rivals to steal employees.  Yeah, sure. 


The General Assembly wants the North Carolina state treasurer to have more leeway to invest pension money, according to the Associated Press.  The Senate gave final legislative approval to allow the treasurer’s office to invest up to 10% of retirement funds in things like timberland, commodities and securities rated below investment grade.  The House previously agreed to the changes, and the bill now heads to the Governor.  The treasurer said she needs more flexibility to keep returns at or above what is needed to meet long-term retiree obligations.  Meanwhile, the state retirement system remains one of the nation’s healthiest public pension funds, despite losing $21 Billion between January 2008 and March 2009.  Let’s see...we just lost  $21 Billion in “safe” investments, so let’s get riskier.  Right. 


Knappenberger was accused of having made sexually suggestive comments to a female officer and an unwelcome physical contact with her.  He learned that if he retired 19 months early, he would continue to receive his lifetime health insurance coverage.  If terminated, he would lose such coverage.  Rather than running a risk of being terminated and losing health coverage, Knappenberger retired early.  After retiring, Knappenberger filed an action in state court under 42 USC §1983, alleging that his employer had unconstitutionally deprived him of property and liberty interest without due process of law.  The employer removed the action to federal court, and filed a motion for judgment on the pleadings, which the district court granted, holding that Knappenberger could not establish constructive discharge absent a showing of intolerable or discriminatory working conditions.  On Knappenberger’s appeal, the appellate court affirmed. His complaint did not allege an involuntary retirement.  His complaint merely alleged that he anticipated he would be terminated, and he resigned in order to retain his lifetime health insurance.  He did not allege any facts that could establish that a reasonable person in his situation would have felt deprived of free will in making the decision to retire.  Knappenberger v. City of Phoenix, Case No. 07-15774 (U.S. 9th Cir., May 26, 2009). 


For nine years, the City of Mt. Vernon, Illinois, allowed police officers who missed their weekend work shifts to attend National Guard duties to make up the time on their scheduled days off.  The City provided no comparable scheduling benefit to non-Guard employees who missed work for other, non-military activities.  A federal appellate court was faced with the issue of whether, under the Uniformed Services Employment and Reemployment Act, the City must continue to provide these work scheduling preferences to National Guard employees, even though nothing in USERRA would have required the City to establish preferences in the first place.  The appellate court held that USERRA does not require such preferential treatment, and accordingly affirmed the district court’s grant of summary judgment in favor of the City.  The preferential work scheduling policy that the City previously extended to National Guard employees was not a “benefit of employment” within the meaning of USERRA, as such benefit was not generally available to all employees.  It follows that the City’s rescission of that policy, then, could not be a denial of any benefit of employment actionable under USERRA.  Crews v. City of Mt. Vernon, Case No. 08-2435 (U.S. 7th Cir., June 2, 2009). 


Responding to a Wall Street Journal editorial, Beth Almeida, Executive Director of National Institute on Retirement Security, says the piece was misguided in its suggestion to move California’s public servants from a defined benefit pension into defined contribution individual retirement accounts.  Freezing pensions and switching to a system of individual accounts can carry additional costs.  The reason is twofold:  accounting rules can require pension costs to accelerate in the wake of a freeze and maintaining two plans is more costly than operating one.  The last thing California needs right now is to take action that would require more contributions.  In 2005, Alaska hastily closed its pension plan and found that the costs increased dramatically, which is why the legislature has held hearings this year to move back to the pension system (see C&C Newsletter for May 28, 2009, Item 1).  Further, in West Virginia and Nebraska, lawmakers moved back to the pension system after a failed experiment with a system of individual DC accounts.  Research shows that pensions are the most fiscally responsible way to fund retirement.  The economic efficiencies embedded in pensions enable them to deliver the same retirement benefit at half the cost of individual accounts.  Pensions realize cost savings from longevity risk pooling, maintain optimal portfolio diversification and earn higher returns as compared to individual accounts.  To cite another state that has given its public workers a choice of retirement plans, Florida’s public employees can choose between pensions and individual accounts.  Only 21% opt for individual accounts.  (And we’d bet that those participants are pretty sorry right about now.) 


The Associated Press reports that the Treasury Department will allow ten of the nation’s largest banks to repay $68 Billion in bailout money they received from the $700+ Billion Troubled Asset Relief Program created by Congress last October (see C&C Newsletter for May 21, 2009, Item 9).  The banks have been eager to get out of the program to escape government restrictions, such as caps on executive compensation.  All eight banks that took TARP money and last month passed government “stress tests” confirmed that they received permission to repay the bailout funds.  They are JPMorgan Chase & Co. ($25 Billion), Goldman Sachs Group Inc. ($10 Billion), U.S. Bancorp ($6.6 Billion), Capital One Financial Corp. ($3.6 Billion), American Express Co. ($3.4 Billion), BB&T Corp.  ($3.1 Billion), Bank of New York Mellon Corp. ($3 Billion) and State Street Corp. ($2 Billion).  Morgan Stanley did not pass the government test, but said it had raised enough capital and was approved to repay its TARP money ($10 Billion).  Northern Trust Corp. was not among the 19 banks subjected to stress tests, but said it had also received permission to repay the bailout funds ($1.6 Billion).  Experts say allowing ten banks to return $68 Billion in bailout money illustrates that some stability has returned to the system but caution that the crisis is far from over.  Some worry the repayments could widen the gap between wealthy and weak banks.  Three of the nation’s biggest banks -- Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. -- are still tied to the bailout.  (Besides Treasury’s potential income from the sale of the warrants issued by the banks as part of the loan package, the ten banks have already paid dividends on government-owned preferred stock totaling $1.8 Billion -- not a bad return for the public over seven months.)


Center for State and Local Government Excellence conducted a survey of government managers.  A Tidal Wave Postponed:  The Economy and Public Sector Retirements finds the slumping economy is holding back retirements among state and local government employees: 

  • Half of respondents to the survey said 20 percent or more of their workers are eligible to retire in the next five years. 
  • An overwhelming majority of respondents (80 percent) said the economy is affecting the timing of retirements; 85 percent said employees are delaying retirements; 9 percent said employees are accelerating their retirements to avoid changes that will reduce benefits; 7 percent said employees are taking incentives for early retirement. 

But there is a silver lining to delayed retirements.  Governments have a lot of older workers who work in specialized fields and are hard to replace.  Retaining these individuals a little longer gives more time to help new employees prepare to fill their shoes.  But many lack a plan to develop their workforce: 

  • A majority of respondents (56 percent) said their governments do not have a formal plan to develop their workforce, while 39 percent said they did. 
  • Of those with a plan, just 31 percent had made changes in their plans, while 54 percent said they had not made changes.

Workforce planning now will pay off later.  When the economy rebounds and the retirement-eligible employees do retire, combined with the layoffs that governments are implementing, there could be a tremendous strain on their ability to deliver services.


After settling with Merrill Lynch and another of its employees (see C&C Newsletter for February 12, 2009, Item 1), the Securities and Exchange Commission has settled with Michael A. Callaway, an investment adviser representative and head of Merrill’s Ponte Vedra, Florida office.  By order dated June 8, 2009, pursuant to Callaway’s offer of settlement, SEC made the following findings: 

From at least 2000 through 2005 (the “relevant period”), Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”), through its pension consulting services advisory program, breached its fiduciary duty to certain of the firm’s pension fund clients and prospective clients by omitting to disclose material information.  During the relevant period, Callaway was an investment adviser representative for Merrill Lynch, and in that capacity owed a fiduciary duty to the firm’s pension fund clients to whom he provided advice.  Those clients included public pension funds seeking advice and developing appropriate investment strategies and in selecting investment managers to manage assets entrusted to their care.  In providing such advice, Callaway omitted to disclose to some of the firm’s pension consulting clients that certain managers included in search results had not been vetted and approved in advance by Merrill Lynch.  Callaway also failed to disclose material facts involving a conflict of interest inherent in clients’ use of Merrill Lynch’s transition management group.  In addition, up to and including 2003, Callaway failed to disclose fully, when entering into an arrangement for directed brokerage, the facts creating a material conflict of interest inherent in recommending use of directed brokerage to pay hard dollar fees.  Callaway’s fee disclosure policies were consistent with those of Merrill Lynch, and after 2003, in some instances exceeded those policies.  Moreover, Callaway’s conduct was known to Merrill Lynch, which never directed Callaway to make further disclosures.  However, by omitting to disclose the aforesaid facts to his clients, Callaway aided and abetted and caused Merrill Lynch’s violation of Section 206(2) of the Advisers Act.  Accordingly, SEC ordered that Callaway cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Advisers Act; Callaway be censured; and Callaway pay civil money penalty in the amount of $20,000.  By letter dated June 5, 2009 addressed to “My Friends, Associates and Former Clients,” Callaway wrote to inform them of conclusion of the long standing SEC investigation (see C&C Newsletter for February 12, 2009, Item 2): 

Without admitting to any wrongdoing, I agreed to an S.E.C. reprimand and to pay a civil fine of $20,000.  Most important to me, the S.E.C. acknowledged that my fee disclosure policies at that time were consistent with, and often exceeded, those of Merrill Lynch ... .  It also acknowledged that my policies and conduct were known to Merrill Lynch, which never instructed me to make changes or any further disclosures. ...

For twenty-three years, those of us in my office worked hard to provide a high level of consulting services to all of our clients.  We took our responsibilities seriously and acted at all times in what we believed to be our clients’ best interests.  I believe that our business grew and thrived over the years because our clients valued our contribution and I do not believe that this S.E.C. matter makes that contribution any less significant.  It was my pleasure to have worked with so many of you. 

Please note that conclusion of this proceeding (File No. 3-13356) closes only administrative proceedings against Merrill Lynch and any of its employees or former employees.  


“Helping your bladder enjoy going to the movies as much as you do,” is the by-line of a new site that advises movie-goers of the best time to take that required bathroom break.  Every movie has a few scenes in there somewhere that are not crucial to the plot.  Every movie has a few minutes you can miss and not be lost when you sit back down.  Now, no more guessing.  So, if you really have to go, first go to ... of course.  Thanks to Nevin Adams for the lead on this one. 


When cannibals ate a missionary, they got a taste of religion. 


“You better cut the pizza in four pieces; I’m not hungry enough to eat eight.”  Yogi Berra

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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