Cypen & Cypen
JULY 20, 2004
Stephen H. Cypen, Esq., Editor
Chapter 934, Florida Statutes, the Security of Communications Law, was enacted by the Florida Legislature to assure personal rights of privacy in the area of oral and wire communications. The Legislative findings reflect the Legislature's concern for protecting privacy rights of Florida citizens: "to safeguard the privacy of innocent persons, the interception of wire or oral communications when none of the parties to the communication has consented to the interception should be allowed only when authorized by a court of competent jurisdiction and should remain under the control and supervision of the authorizing court. Interception of wire and oral communications should further be limited to certain major types of offenses and specific categories of crime with assurance that the interception is justified and that the information obtained thereby will not be misused." Generally, it is unlawful for a person willfully to intercept, endeavor to intercept or procure any other person to intercept or to endeavor to intercept any wire or oral communication, which is defined as "any oral communication uttered by a person exhibiting an expectation that such communication is not subject to interception under circumstances justifying such expectation and does not mean any public oral communication uttered at a public meeting or any electronic communication." In an informal opinion dated April 7, 2004, an Assistant Florida Attorney General indicated she is unaware of any decision by a court in Florida upholding audio recording of conversations occurring in a public building simply by virtue of the fact that the conversation occurred in a public building. Accordingly, she could not conclude that audio recording of conversations occurring in municipal offices would generally be permissible. The videotaping of such offices without audio, however, would appear to be less intrusive to the privacy rights of individuals and would appear to accomplish substantially the same purpose. And although videotaping is not covered by Chapter 934, Florida Statutes, it may be advisable for a city to post signs within its buildings or offices advising the members of the public that they are being videotaped.
We recently came across an interesting article in The Individual Investor, dealing with the Securities Investor Protection Corporation. SIPC, a non-profit organization overseen by the SEC, helps customers of failed brokerage firms retrieve their cash and securities. It is funded by U.S. broker-dealers, all of which are required to be members of SIPC. When a broker-dealer closes due to insolvency or bankruptcy, the agency works with a federal court to return investor cash and securities. However, investors should check out what firm clears for the broker. If the broker does not clear trades directly, the clearing firm is the entity that actually holds the cash and securities. Thus, if an outside clearing firm without SIPC membership fails, the investor's broker has no responsibility. Stocks, bonds, mutual funds and other SEC- registered securities are insured up to $500,000.00, including up to $100,000.00 for cash. SIPC coverage does not include unregistered investment contracts, fixed annuities, currency and commodity futures contracts or options. Also, SIPC does not protect customer funds placed with a broker solely to earn interest. SIPC insurance does not protect investors against stock market risks or broker fraud. Market risks, of course, is a normal part of trading securities. In case of brokerage failure, SIPC calculates the value of securities as of the date SIPC files for protection of customer accounts, not when the broker actually closes its doors. Fraudulent activity is governed by federal and state securities laws, and is not insured. Until 2003, many brokers also carried insurance for cash and securities above the SIPC minimum. The additional private insurance protection was seen as a feature to attract larger accounts. However, last year many insurance companies declined to renew expiring policies. Hopefully, brokers will see excess coverage as a selling point and will make available some type of replacement. To find out whether a firm is a member of SIPC, you can search its membership database at www.sipc.org.
The Florida Legislature has amended section 443.101, Florida Statutes, which deals with disqualification for unemployment compensation benefits. Generally, one is disqualified for unemployment compensation benefits if he has voluntarily left his work without good cause attributable to his employer or if he is discharged by his employer for misconduct connected with his work. Now, thanks to the amendment, for benefit years beginning on or after July 1, 2004, an individual is not disqualified for voluntarily leaving work to relocate as a result of his or her military-connected spouse's permanent change of station orders, activation orders or unit deployment orders. Chapter 2004-237
The Associated Press reports that MCI Inc. and several former executives agreed to pay up $51 Million Dollars to settle suits filed by workers whose retirement accounts lost billions of dollars after an accounting scandal caused the company's stock to plunge. Under the agreement, MCI and its insurance companies will contribute about $47 Million Dollars to a fund for approximately 50,000 employees whose retirement plans lost money. The balance will be paid by former executives, including former CEO Bernard Ebbers. The stock in the company, formerly WorldCom Inc., plummeted in 2002 after an $11 Billion Dollar accounting fraud pushed the company into bankruptcy. Earlier this year, the "new" company emerged from Chapter 11 protection. The settlement covers anyone who participated in WorldCom's 401(k) Plan from September 18, 1998 through July 21, 2002. The accounting scandal nearly wiped out retirement savings of many employees, who said the company's culture encouraged them to concentrate their savings in company stock -- a pressure that only intensified when the stock's value shot up in the 1990s. This settlement does not resolve employees' $100 Million Dollar suit against retirement fund administrator Merrill Lynch. (In May, Citigroup Inc. agreed to pay $2.65 Billion Dollars to settle a suit by WorldCom investors, alleging fraud).
Scarlet Knowles was a firefighter/paramedic with the Orlando Fire Department. While walking around the perimeter of a building at a fire scene, Knowles stepped in a hole and hurt her ankle. Several medial reports, including one obtained by the Pension Board's independent medical examiner, found no objective evidence of permanent injury, a zero-percent impairment rating and no work restrictions. At least one doctor cleared Knowles for full duty. (The City's Risk Management Department had Knowles followed and videotaped showing her performing functions that she previously stated she could not do.) Knowles applied for line-of duty disability. The Fire Chief authorized Knowles to work light duty and advised her to report to the training division. Knowles reported, but left the training division without permission after spending about six hours of the required eight hours of light duty. The Chief thereupon terminated Knowles due to her continued unwillingness to comply with departmental policies and specific orders issued to her. Almost five months after termination and after "surgical reconstruction" of her ankle Knowles filed an amended application for line-of duty disability. This time, the Board's doctor found that Knowles had a permanent ankle condition that totally disabled her as a firefighter/paramedic. After a quasi-judicial hearing, the Board determined that Knowles was not permanently and totally disabled prior to her termination. Knowles sought review in the circuit court, which review is governed by a three-part standard: (1) whether procedural due process is accorded; (2) whether the essential requirements of law have been observed; and (3) whether the administrative findings and judgment are supported by competent substantial evidence. In denying review, the circuit court correctly declined to reweigh the evidence and substitute its judgment for that of the Board. Further, the Board was correct to rely upon the medical opinions that were given prior to Knowles' termination date. Knowles v. Orlando Firefighter Pension Board of Trustees, 11 Fla. L. Weekly Supp. 599 (Fla., 9th Cir. March 10, 2004.
Investment valuation numbers are critical for a variety of reasons. Without them, pension fund managers are ill-equipped to allocate assets effectively, re-balance positions and hedge financial risks. Yet, even when valuation numbers are readily available, they can be misleading, misunderstood, incomplete or too old to be useful. A solid understanding of what valuation estimates do -- and do not -- represents the first step in avoiding costly mistakes, especially for securities that are not publicly - traded or trade infrequently. Private equity or hedge funds investments are good examples. First, interpreting valuation numbers requires knowing the underlying standard of value: Fair market value? Investment value? Book value? Liquidation value? Second, valuation date is a consideration. Reported numbers only reflect value at a particular point in time. Third, reporting requirements are a factor. Do the valuation numbers reflect a smoothing or any other regulatory requirement? Last, there is the data issue: format, calendar period, frequency of collection and source all have a potential effect on valuation. In sum, anyone using valuation numbers must ask hard questions. Failing to do the requisite homework regarding valuation estimates can be costly. Knowing where to begin can be a problem, especially if members of a pension board are not investment specialists (as is usually the case). Trustees should ask vendors who prepare valuation reports to explain their work in "plain English." Be vigilant and remember that published information can be a help or a hindrance, depending on its completeness and accuracy. We thank Dr. Susan M. Mangiero, Accredited Valuation Analyst, author of the article of which this piece is a summary.
Section 286.011(a), Florida Statutes, permits any
governmental agency, its chief executive and its attorney to meet in
is party to litigation and the attorney desires advice concerning
settlement negotiations or strategy. Because they take place "out of the
sunshine," these meetings are euphemistically referred to as "shade
meetings." The statue requires that the governmental entity's
attorney shall advise the entity at a public meeting that he desires
advice concerning litigation. Using a published and posted notice of
a meeting of the entity to advise the entity that the attorney seeks
its advice in a closed attorney-client session does not comply with
the statute. Rather, such announcement must be made at a public meeting:
that is, a meeting the public has a right to attend. AGO 2004-35 (July
Citigroup Inc. will pay New York City as much as $45 Million to make up for losses suffered by its five pension funds, according to a PLANSPONSOR.com report. The City's pension fund sustained an $80 Million Dollar loss in connection with a securities lending program administered by Citigroup. In settlement, Citigroup will make an immediate payment of $15 Million to the funds. Further payments are contingent upon what, if anything, the funds recover from other involved parties. Those parties include officers and directors of now-defunct National Century Financial Enterprises, into which the City's collateral was invested. The main issue between the pension funds and Citigroup revolved around whether Citigroup followed the fund's guidelines in carrying out its securities lending program.
In a lead article, Pension&Investments reports that unfunded pension liabilities of the 100 largest corporate plans fell an astonishing 41% last year, due to a 72% increase in employer contributions and a recovering stock market. In 2003, the largest corporate pension plans were underfunded by $88.7 Billion, down from $151 Billion in 2002 and $108 Billion the year before that. Employer contributions rose to $51.5 Billion from $30 Billion in 2002. All the while, investment returns leaped to a combined $150.7 Billion in 2003, compared with the loss of $76.6 Billion the year before and a loss of $72.4 Billion in 2001. Despite the so-called economic recovery, 75% of the company's lowered their long-term rate of return assumptions. The average long-term rate of return assumption was 8.6% for 2003, down from 9.1% in 2002. Of the 100 companies reviewed for last year, only seven reported long-term rate of return assumptions greater than 9%, compared with 57 in 2002 and 87 in 2001.
In an editorial, Pensions&Investments lauds the Securities and Exchange Commission's decision to lift the confidentiality of correspondence related to disclosure filings. However, P&I uses that occasion to call for an end to confidential treatment for another matter: namely, letters of deficiency or notices it sends to registered investment advisors after conducting periodic examinations of money management firms. The letters advise money management firms of lack of compliance with SEC Regulations, from minor irregularities to serious violations. Investors must rely on the cooperation of investor advisors to release such letters, but inasmuch as the SEC does not release them, there is no incentive to do so. About 90% of all SEC examinations result in deficiency letters, admittedly technical violations for the most part. Confidentiality of the letters means a lot of information about money manager violations is unreported or at least underreported. Until the SEC lifts the disclosure ban, plans sponsors should insist that their money managers (or potential money managers) provide them with the letters.
School district adopts an early retirement option under which teachers are paid $20 Thousand if they retire when first eligible. Subsequently, district adopts additional option (not available to those who failed to exercise first option) under which teachers who qualify for retirement may stay on as long as they like and receive an extra $7 Thousand a year for next three years of service. Teachers over the age of 55 who did not take first option sue, claiming that not making second option available to them violates The Age Discrimination In Employment Act, 29 U.S.C § 621 et. seq. They prevail in trial court because that option does not come within exception for bona fide early retirement incentive plans, despite district's argument that teachers receiving the extra $7 Thousand will want to retire soon so that their pensions will be based on the higher amount. On appeal, the Unites States Court of Appeals for the Second Circuit found that the district court acted properly in eliminating the second option altogether. And, reversing the lower court's ruling to the contrary, the appellate court also held that plaintiffs were entitled to attorneys' fees. Abrahamson v. The Board of Education of the Wappingers Falls Central School District, Case Nos. 02-7841, 02-7869, 02-9401, 02-9409 and 02-9410 (U.S. 2d Cir. July 1, 2004)
From a piece in CFO.com, we learn that Wharton will shift the focus of its executive education on pensions from the sell side to the buy side. In the past, the faculty at Wharton has dedicated courses to asset-management side of the pension equation. The pension sessions tended to be minor segments of a broader risk management course, which usually attracted money managers and board members whose aim it was better to understand fund management. Now, the school will offer a three-day course that will look at the liability side of the pension picture. Recent accounting scandals, post-dotcom stock market lull and aging of the baby-boom population have created a demand for more information about plan design, regulation, risk management and legal issues. Suddenly, senior executives are realizing that they have a fiduciary responsibility in a field that they never paid much attention to! Directors and officers face increased risk and liability if they do not promote better governance and more financial transparency in all areas of corporate finance, including pension planning and administration. What's more, executives at companies that offer defined benefit plans face fiduciary liabilities that include accounting and legal exposures associated with underfunded pensions. The course will address several key pension issues: avoiding common pitfalls in design strategy; developing an effective response to changing rules, demographics and economics; assessing investment education and communications; and managing the liabilities of plan assets. A look at pension programs will give executives an insight into their business operations. After all, accounting, bankruptcy, labor relations and capital markets issues that executives must study in mastering retirement plan field are a micro-cosim of corporate finance. At last, somebody gets it.
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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.