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Cypen & Cypen
JUNE 25, 2009

Stephen H. Cypen, Esq., Editor


Board of Trustees of Delray Beach Police and Firefighters’ Retirement System brought suit against Smith Barney for damages in excess of $9 Million.  The claims include breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation.  Pursuant to two pension consulting agreements, Smith Barney served as the fund’s pension consultant from 1995 until 2006.  The Board maintained that the pension consulting agreements created a fiduciary relationship between Smith Barney and the Board.  The pension consulting agreements did not contain arbitration clauses.  On two separate occasions, at the request of Smith Barney, the then-chairman unilaterally executed Smith Barney account applications, which, themselves, contain arbitration provisions.  Smith Barney moved to compel arbitration pursuant to those provisions in the account applications.  By Order dated June 23, 2009, United States District Judge Kenneth L. Ryskamp denied Smith Barney’s motion to compel arbitration.  Although there is a strong federal policy in favor of arbitration, parties are not required to arbitrate when they have not agreed to do so.  The Board argued that the then-chairman lacked both actual and apparent authority to execute the separate account applications.  Challenges as to whether an alleged obligor ever signed a contract, whether signor lacked authority to commit the alleged principal and whether signor lacked mental capacity to assent are to be judicially resolved.  The Board had a designated review process for both execution of and modification to pension consulting agreements.  That process included Board adoption only after authorization by a majority of the Board and after submission of same to outside counsel.  Further, Florida Statutes provide that decisions relating to pension trust funds for firefighters and police officers must come from majority votes of board members.  Sections 175.071(2) and 185.06(2), Florida Statutes.  Thus, the then-chairman did not have actual authority to execute an arbitration agreement in behalf of the Board.  Similarly, the then-chairman did not have apparent authority to execute an arbitration agreement in behalf of the Board because Smith Barney participated in the process with reference to the pension consulting agreements and knew that the then-chairman could not sign the account agreements without approval of the Board and its counsel.  (Besides, even if the Board held the then-chairman out has having such authority, the foregoing statutes would prevail:  the legislature is free to abrogate the common law as to apparent authority.)  Finding that the then-chairman was without either actual or apparent authority to execute the account agreements (containing arbitration clauses), the Court declined to enforce those clauses.  The case is of obvious importance to the parties.  However, the following statement is of general significance:  “The statutes indicate a legislative intent to ensure that decisions relating to firefighter and police officer pension trust funds come from majority votes of board members.”  We are pleased to have served as co-counsel to the Board of Trustees, one of our regular clients.  Board of Trustees of Delray Beach Police and Firefighters’ Retirement System v. Citigroup Global Markets, Inc., Case No. 08-81474 (S.D. Fla., June 23, 2009) (Order Denying Motion to Compel Arbitration and Denying Motion for Rehearing). 


Like California (see C&C Newsletter for May 14, 2009, Item 5) and New York (see C&C Newsletter for April 30, 2009, Item 8 and C&C Newsletter for May 21, 2009, Item 11), Texas’s $78 Billion Teacher Retirement System, sixth-largest public pension fund in the U.S., has adopted a policy prohibiting pay-to-play by companies trying to win business managing investments.  As of July 1, those seeking management work for the fund will face disclosure requirements regarding placement of agents and restrictions on fees paid them, according to the new policy analyzed by Bloomberg.  Pay-to-play refers to the practice of exchanging cash with officials, frequently political contributions, in return for government business.  All investment decisions must be based solely on the merits in conformity with fiduciary standards and applicable law.  Staff is required to obtain full disclosure of all matters having potential to harm the system’s reputation or integrity of its investment process.  We have prepared, and distributed, a proposed placement agent policy (see C&C Newsletter for June 11, 2009, Item 1). 


Employee Benefit Research Institute asks the age-old question:  What are the major sources of funding of public-sector pension plans in the United States?  Unlike private-sector defined benefit plans, public-sector pension plans are not funded entirely by employers.  They are financed by workers as well as employers, according to EBRI, an independent nonprofit organization that does not take policy positions and does not lobby.  Public pension revenue relies on three sources:  earnings from investments, government (employer) contributions and employee contributions.  Public pension plans depend largely on investment earnings, because they are generally financed on a “funded” basis rather than a pay-as-you-go basis.  Among the sources income, investment earnings typically have accounted for the largest portion of plan funding.  From 1997 to 2007, except for fiscal years 2001-2003, investment earnings made up between 71% and 82% of public pension funding; employer contributions accounted for between 13% and 20% of funding; and employee contributions for 6% to 9%.  Although most of our readers surely know how public pension plans are funded, it never hurts to reemphasize the facts. 


Mellon Transition Management predicts that a record number of financial institutions such as pension funds and endowments will replace asset managers in the third and fourth quarters of 2009.  According to PRNewswire, the general trend of  the last six months has been for institutions to increase their exposure to indexing and longer-duration bond strategies.  Despite other indications to the contrary (see C&C Newsletter for June 18, 2009, Item 6), these institutions are seeking to reduce risk, which appears to include scaling back on firms actively managing assets.  Mellon bases its prediction on the more than 40% increase in the number of pre-trade inquiries during the first five months of 2009 and a substantial jump in executed transactions in the second quarter of 2009 vs. the 2009 first quarter.  Pre-trade inquiries have proved to be a good predictor of transition activity, often leading actual transaction activity by several months.  Pre-trade inquiries are done by institutions that gauge the cost and risk of switching managers. 


Results of Mercer’s latest Leading Through Unprecedented Times coincide with item 4 above.  Organizations are more likely to change investment strategy to reduce risk (38%) rather than change funding policy (25%); 14% and 12%, respectively, have already taken these steps.  Further, 73% of organizations globally do not plan to reduce the level of employer contributions to defined contribution plans in the remainder of 2009. 


President Obama has signed a presidential memorandum on federal benefits and non-discrimination.  The memorandum follows a review by the Director of the Office of Personnel Management and the Secretary of State regarding what benefits may be extended to same-s.ex partners of federal employees in the civil service and the foreign service within confines of existing federal laws and statutes.  For civil service employees, domestic partners of federal employees can be added to the long-term care insurance program; supervisors can also be required to allow employees to use their sick leave to take care of domestic partners and non-biological, non-adopted children.  For foreign service employees, a number of benefits were identified, including use of medical facilities at posts abroad, medical evacuation from posts abroad and inclusion in family size for housing allocations.  The memorandum requests that Director of OPM and the Secretary of State act to extend to same-s.ex partners of federal employees benefits they have identified.  The memorandum also requests heads of all other executive branch departments and agencies to conduct internal reviews to determine whether other benefits they administer might be similarly extended, and to report results of those reviews to the Director of OPM.  Finally, the memorandum directs OPM to issue guidance within ninety days to all executive departments and agencies regarding compliance with, and implementation of, the civil service laws, which make it unlawful to discriminate against federal employees or applicants for federal employment on the basis of factors not related to job performance.  There has been some issue as to legal effectiveness of a presidential memorandum as compared to an executive order.  According to a January 29, 2000 opinion for the counsel to the president, a presidential directive has the same substantive legal effect as an executive order.  It is the substance of the presidential action that is determinative, not the form of document conveying that action. Both an executive order and a presidential directive remain effective upon a change in administration, unless otherwise specified in the document, and both continue to be effective until subsequent presidential action is taken. 


Gross brought suit against his employer, alleging that he had been demoted in violation of the Age Discrimination in Employment Act of 1967, which makes it unlawful for an employer to take adverse action against an employee because of such individual’s age.  At close of trial, over employer’s objections, the district court instructed the jury to enter a verdict for Gross if he proved, by a preponderance of the evidence, that he was demoted and his age was a motivating factor in the demotion decision, and told the jury that age was a motivating factor if it played a part in the demotion.  The court instructed the jury to return a verdict for the employer if it proved that it would have demoted Gross regardless of age.  The jury returned a verdict for Gross, but the Eighth U.S. Circuit Court of Appeals reversed and remanded for a new trial, holding that the jury had been incorrectly instructed under the standard established for cases under Title VII of the Civil Rights Act of 1964 when an employee alleges that he suffered an adverse employment action because of both permissible and impermissible considerations (that is, a “mixed-motives” case).  On certiorari review, the Supreme Court of the United States held that a plaintiff bringing an ADEA disparate-treatment claim must prove, by a preponderance of the evidence, that age was the “but-for” cause of the challenged adverse employment action.  The burden of persuasion does not shift to the employer to show that it would have taken the action regardless of age, even when a plaintiff has produced some evidence that age was one motivating factor in that decision.  Because Title VII is materially different with respect to the relevant burden of persuasion, interpretation of ADEA is not governed by Title VII decisions.  ADEA’s text does not authorize an alleged mixed-motives age discrimination claim.  The ordinary meaning of ADEA’s requirement that an employer took adverse action “because of” age is that age was the “reason” the employer decided to act.  The split was an expected 5-4. with Justice Kennedy (as usual)  being the swing vote.  Gross v. FBL Financial Services, Inc., Case No. 08-441 (U.S., June 18, 2009).  


Keith Olbermann’s “Worst Persons in the World” segment on MSNBC usually targets conservative commentators.  Recently, however, Olbermann chose to dishonor the Brooksville, Florida, City Council.  According to the St. Petersburg Times, Olbermann lampooned the Council for passing a dress code for city employees, which dictates that employees use deodorant, keep their tattoos and wounds covered, not wear spandex or revealing clothing, and only wear piercings in their ears.  Oh, and they must wear underwear!  The last part particularly got Olbermann, who made references to Mayor Joe Bernardini’s questions about who will monitor compliance with the “skivvies rule.”  Bernardini was the sole dissenter in a 4-1 vote. By the way, do your underpants have holes in them?  No?  Then, how do you get them on?


Irene Prusik recently showed up at the Department of Motor Vehicles to renew her driver’s license, quite amazing since Irene has been dead for six years.  Well, it turns out, of course, that it wasn’t Irene, after all, renewing her license, but her son.  The 49 year old son has now been charged with grand larceny, criminal impersonation and other charges for his part in concocting the bizarre plot to impersonate his deceased mother so he could collect $117,000 in government benefits.  He had lived with his mother until she passed away in 2003, at age 73.  He managed to conceal the death by falsifying her death certificate, collecting $52,000 from her $700-a-month Social Security checks and another $65,000 in rent subsidies.  If this psycho ever gets out of jail, we assume he will check into Bates Motel.  We thank Nevin Adams for pointing us to this piece.


Since 1999, Transamerica Center for Retirement Studies, a non-profit corporation dedicated to educating the public on emerging trends surrounding retirement security in the United States, has conducted a national survey of U.S. business employers and workers regarding their attitudes toward retirement.  Here are some high-level findings from the 10th Annual Survey, entitled “Strengthening Retirement Savings in a Weak Economy:”

  • A majority of workers (53%) reported that their employers had implemented some type of reduction, especially layoffs, in the last twelve months. 
  • Forty-six percent of workers expect the economy to get worse over the next twelve months, while half as many expect it to get better. 
  • Most workers feel less confident than they did twelve months ago with their ability to achieve a financially secure retirement. 
  • About half of workers are still confident that they can retire with a lifestyle they consider comfortable. 
  • More than one-third of workers have changed their retirement age expectations within the last twelve months. 
  • Thirty-seven percent of workers expect to work beyond age 70 or never plan to retire at all. 
  • A vast majority of workers (91%) value 401(k) and other employee self-funded plans as an important benefit. 
  • Workers most frequently cite 401(k) and similar plans as their expected primary source of income to cover living expenses after they retire.  [Boy, are they ever going to be disappointed.]
  • Full-time workers are far more likely (84%) than part-time workers (40%) to have an employee-funded retirement plan offered to them.  Full-time workers of large companies are most likely (92%) to be offered an employee-funded plan. 
  • Workers who are offered retirement benefits at work are more likely to be saving for retirement outside of work.  [That figures.] 
  • Workers at small companies are more likely to prefer a higher salary over excellent retirement benefits.  [Another common mistake.] 
  • Most workers agree that they do not know as much as they should about retirement investing.  [No kidding!] 
  • Very few workers (8%) have “a great deal” of understanding when it comes to asset allocation principals while nearly one-third (30%) have no understanding.  [Duh.]
  • Overall, workers estimate needing about $750,000 in order to feel financially secure by the time they retire.  When workers were asked how they estimated the amount they need to retire, a majority guessed.  [Yes, guessed.] 
  • About one-quarter have saved less than $25,000 and 15% of workers are “not sure” how much money they have saved.  [No joke, folks.]
  • Nearly one-third of workers who are investing for retirement use a professional financial adviser.  [Considering the earlier answers, this one is hard to believe.] 

Thus, even in difficult economic times, the vast majority of workers value an employee-funded retirement plan as an important benefit, and they are continuing to save for retirement.  In addition to saving, the survey found important opportunities for workers to better their chances of a financially secure retirement.  Finally, the survey found important opportunities for policy makers and the retirement industry to promote retirement savings and preparedness. 


Employers have long had a significant impact on workers’ retirement prospects, according to a new Issue in Brief from Center for Retirement Research at Boston College.  Aside from Social Security, employer retirement income plans are the most important source of income for the great majority of retirees.  How long workers can stay employed also largely depends on employer hiring and retention/retirement decisions.  Both of these functions -- retirement income support and the separation process -- are now in flux given scheduled declines in Social Security replacement rates, the shift from traditional defined benefit pensions to 401(k)-type defined contribution plans and decline in career employment relationships.  To assess the employer’s response to changes in retirement income support and the work-separation process, a nationally representative survey was conducted in 2006 (yes, 2006), focused on employers’ response to prospects of employees and their jobs.  As before, the survey found that employers expect:  (1) half these employees will lack the resources needed to retire at the organization’s traditional retirement age; (2) one out of four will respond by wanting to stay on the job at least two years past that traditional retirement age; but (3) employers are lukewarm about creating opportunities for even half of these employees to work longer.  Most of the survey was conducted well before the financial crisis; the retirement preparedness of workers has deteriorated since the survey -- making potential employer responses that much more important.  The survey also asked employers about other retirement-related initiatives they might adopt over the next five to ten years.  The survey inquired whether they might:  (1) create employment opportunities for workers to stay on the job longer; (2) significantly increase their encouragement of retirement saving; (3) communicate with individual employees “to develop a plan that makes their retirement a more orderly and predictable process;” and (4) tighten performance reviews “to improve decisions on whether to retain or dismiss” employees.  The analysis finds that employer interest in these retirement-related initiatives is not a response to the retirement income challenge their employees face.  As employers are not in business to provide their employees adequate retirement incomes, this finding is not especially surprising.  But what is surprising is that employers are also not responding to the retirement challenge that they themselves face -- the prospect of large numbers of employees wanting to stay on the job longer than the employer would like.  Number 9-13 (June 2009). 


For the first time in four years, a new city claims the title as worst in the U.S. for road rage.  New York has unseated Miami as the least courteous city, according to the Fourth Annual In the Driver’s Seat Road Rage Survey.  The Big Apple moved up from its Number 3 ranking last year to claim the distinction.  Rounding out the five worst cities for road rage are Dallas/Fort Worth, Detroit, Atlanta and Minneapolis/St. Paul.  (Miami, which had led the list since 2006, finished seventh.)  The survey also named a new city as most courteous.  Portland, Oregon took the top spot, moving up from Number 2 last year.  It was followed by Cleveland, Baltimore, Sacramento and Pittsburgh.  The survey defined road rage as drivers who lose their tempers, cut into lanes, tailgate, speed and honk. 


Here are the first 5 out of 45 lessons on life from the nonagenarian columnist: 

1. Life isn't fair, but it's still good.
2. When in doubt, just take the next small step.
3. Life is too short to waste time hating anyone.
4. Your job won't take care of you when you are sick. Your friends and parents will. Stay in touch.
5. Pay off your credit cards every month.


ATTORNEY: This myasthenia gravis, does it affect your memory at all?
ATTORNEY: And in what ways does it affect your memory?
WITNESS: I forget.
ATTORNEY: You forget? Can you give us an example of something you forgot? 


A sign on the lawn at a drug rehab center said:  “Keep off the Grass..” 


“Friends may come and go, but enemies accumulate.”  Thomas Jones

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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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