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Cypen & Cypen
AUGUST 19, 2010

Stephen H. Cypen, Esq., Editor

1.            WATCH OUT FOR FRAUD IN YOUR 401(K):  The U.S. Department of Labor has published ten signs that your 401(k) retirement account may be subject to fraud: 

(a)            Your quarterly 401(k) statement is consistently late or comes at irregular intervals. 
(b)            Your account balance appears to be inaccurate. 

(c)            Your employer failed to transmit your contribution to the plan on a timely basis. 

(d)            A significant drop in account balance appears that cannot be explained by normal market ups and downs. 

(e)            Your 401(k) statement shows a contribution from your paycheck was not made. 

(f)            Investments listed on your statement are not what you authorized. 

(g)            Former employees are having trouble getting their benefits paid on time or in the correct amounts. 

(h)            Unusual transactions show up. 

(i)            Frequent and unexplained changes take place in investment managers or consultants. 

(j)            Your employer has recently experienced financial difficulty. 

Workers with 401(k) plans realize the risk of losing money in the markets.  But, they do not expect to lose their money before it gets to the markets. 

 2.            HOW LOCAL GOVERNMENTS ADDRESS RETIREE HEALTH CARE FUNDING:  State and local governments have often been on the forefront of efforts to contain health care costs and encourage employees to make positive changes that lead to healthier lifestyles.  As both costs and the number of retirees increase, governments are closely examining their approach to post-employment benefits other than pensions (OPEB).  Although a number of governments have made promising starts in wellness/disease management programs, creating health care pools that provide uniform benefit levels for active workers/retirees and making health care accessible for routine/preventive medicine, the fact remains that there are hard decisions to be made about who is eligible for retiree health care coverage and when.  In July 2009 the Center for State and Local Government Excellence released a survey of what all states and over 2,000 local governments were doing to contain and reduce costs, and approaches they are taking to fund retiree health care liabilities. The original survey data, collected in 2007, reported on local governments' adoption of various OPEB strategies, including prefunding mechanisms (for example, OPEB trust funds), and changes to retiree health care (RHC) plan design.  In addition to jurisdictions that reported having already adopted such strategies, many more indicated that they were very likely to follow suit in succeeding years.  Those "most likely adopters" and their recent experience with OPEB strategy adoption are the focus of an August 2010 issue brief, which reports a follow-up survey of local government most likely adopters of various OPEB strategies, which included: 

  • establishing a Section 115 trust (governmental); medical subaccount (401 (h)); or Voluntary Employee Beneficiary Association (VEBA) trust (501 (c) (9)); 
  • issuing OPEB bonds;
  • increasing years of service for vesting for RHC;
  • increasing age at which RHC is available;
  • terminating RHC for all new hires.

Two important caveats must be noted.  First, OPEB strategies considered in the brief are not the only options available to governments (raising premiums/co-pays are examples of other cost-shifting strategies), but rather are among the most potentially-effective ones for addressing OPEB liability.  Second, although the local governments sampled can rightly be called most likely adopters, no doubt many other local governments have adopted OPEB reforms since 2007.  The list of most likely adopters culled from the 2007 survey included 206 jurisdictions, some of which indicated a strong likelihood of adopting multiple OPEB strategies (e.g., establishing a dedicated trust and increasing years of service to qualify for retiree health care).  The surveys asked jurisdictions the status of the specific OPEB strategy or strategies they previously indicated a high likelihood of adopting.  Thirty-six percent have increased or plan to increase years of service required to vest; eleven percent have increased the retirement age; and thirty-nine percent have eliminated or plan to eliminate retiree health care benefits for new hires.  The brief also reports factors perceived to impede OPEB strategy adoption in those jurisdictions that -- despite having previously indicated a strong likelihood of doing so -- failed to adopt one or more OPEB strategies. 

 3. CADILLAC ESCALADE POPULAR...AMONG THIEVES:  The blinged-out Cadillac Escalade SUV, a favorite of A-listers like Tiger Woods, is once again the vehicle most likely to be stolen according to The Associated Press.  The Ford F-250 crew cab pickup, Infiniti G37 two-door car, Dodge Charger with its high-power HEMI engine and Chevrolet Corvette Z06 round out the list of the top five vehicles most likely to be subject of insurance theft claims.  Least likely targets of thieves are family vehicles like the Volvo S80, Saturn Vue, Nissan Murano, Honda Pilot and Subaru Impreza.  The Escalade, which starts at over $62,000, has ranked as the most-stolen in six of the last seven reports. A theft claim is filed for one out of every 100 insured Escalades, and the average insurance payout is $12,000, which  compares with an average of under $7,000 for all vehicles.  Almost one-in-every-four Escalade theft claims is for $40,000 or more.  Escalades are equipped with antitheft ignition immobilizers that prevent them from being started without a special key (so far, so good), but that does not prevent thieves from hauling them away on flatbed trucks.  Good old Yankee ingenuity. 

 4. HOW WORKERS USE VACATION TIME:  A Reuters survey in 24 countries found French employees were most likely to take advantage of vacation days granted, with 89 percent using up all of their days.  Argentinians (80 percent), Hungarians (78 percent) and Britons (77 percent) followed.  At the other end of the scale, Japanese workers were least likely to use all their vacations days, with only 33 percent taking off all  time given.  South Africa and Australia (47 percent each), South Korea (53 percent) and the United States (57 percent) round out the bottom of the list.  There was virtually no difference in terms of demographics when it came to taking leave, with about two-thirds of high and low income earners taking all days available.  Slightly more younger people than people aged over 50 would take all their leave.  However, there was a slight difference, as business owners and senior executives at 60 percent were least likely to use up all time granted to them. 

 5. FOREIGN CORRUPT PRACTICES ACT QUESTIONED:  The U.S. Justice Department may have netted some headline-grabbing settlements for foreign bribery cases, but two recent papers suggest that by forcing companies to disgorge such large amounts of money, the government may be creating perverse incentives.  One such paper, reported by, says large fines may be discouraging internal investigations, and suggests a leniency policy of the kind used in anti-trust enforcement. Another paper found companies that reveal breaches of the Foreign Corrupt Practices Act to regulators end up paying stiffer penalties than those that do not.  Federal sentencing guidelines on companies caught bribing officials include a whole panoply of things for judges to consider, such as size of company, management involvement in the offense,  presence of a compliance program, prior history of malfeasance, cooperation, acceptance of responsibility and profit gained from the crime.  The Justice Department has long said it gives leaner sentences when a company self-discloses wrongdoing.  However, the second paper found harsher penalties for companies self-disclosing violations of  FCPA, based on a review of 40 cases from 2002 to 2009.  These penalties risk discouraging self-reporting, when companies should receive some benefit for coming clean about FCPA transgressions. 

 6. HOW TO AVOID SE.XUAL HARASSMENT PROBLEMS:  Hewlett-Packard said former CEO Mark Hurd did not violate the company's se.xual-harassment policy, but the unfolding drama raises questions:  what does constitute se.xual harassment, and how should firms address the issue?  Marketwatch says strict policy can help companies avoid problems.  Even if misconduct occurred, an employer is not necessarily liable if it has the right policy.  If a company does not have such policy, it is simply leaving a potential defense on the table.  A good corporate policy can prevent problems from growing, according to the Equal Employment Opportunity Commission.  So, what is se.xual harassment?  Unlawful se.xual harassment includes conduct that is severe or pervasive enough to create a hostile work environment or result in a demotion or firing by a supervisor.  Unwelcome se.xual advances, requests for se.xual favors, and other verbal or physical conduct of a se.xual nature constitute se.xual harassment when submission to or rejection of the conduct explicitly or implicitly affects an individual's employment, unreasonably interferes with an individual's work performance or creates an intimidating, hostile or offensive work environment.  Victims and harassers do not have to be opposite se.xes.  The harasser can be a boss, a supervisor in another area, a co-worker or even a non-employee.  Some actions that may create a hostile environment would be leering, telling se.xual or lewd jokes and touching (such as intentionally brushing against another's body).  If one’s goal is to avoid a lawsuit, the proper way to look at it is do not do anything that could be perceived by someone else as inappropriate. 

 7. FLORIDA STILL GETS MOODY’S AA RATING:  With a stabilizing economy, the state of Florida got an encouraging financial report from Moody's, the Miami Herald reports. The debt-rating agency maintained its AA rating on Florida general obligation bonds, deeming them a “very low” credit risk.  The report cited the state's history of  conservative budgets, willingness to raise revenues and cut spending during the recession and strong pension funding ratios.  Moody's also praised the Sunshine State's large and diverse economy.  However, Moody's did warn about Florida's heavy reliance on sales taxes, significant decline in new residents since 2006 and risk of a budget crisis should a hurricane drain the state's windstorm program.  Let’s keep our fingers crossed.

 8. GOVERNING RATES NEW YORK PENSIONS TOPS:  Governing writes that New York is the nationwide pension leader, with the country's highest-funded public pensions at more than 107 percent.  Though the state has long been in fiscal turmoil, it has met its necessary funding every year since at least 1997.  State Comptroller Thomas DiNapoli made it his goal to increase the plan's transparency and ensure it maintains a high level of funding.  To make good on this promise, New York passed pension reforms in 2009.

 9. NEW YORK COMPTROLLER “RESPONDS” TO GOVERNING:   New York State Comptroller Thomas P. DiNapoli has “responded” to Governing Magazine’s reporting the New York State Common Retirement Fund as best-funded plan in the United States.  DiNapoli says while the fund is still recovering from damage done by the Great Recession and excessive risk taking that brought the world's economy to its knees, its historic strength and well-diversified investment portfolio has kept the fund at top of its class.  DiNapoli is well aware that the costs of maintaining the system will be going up, but it is imperative that the fund be kept strong for sake of taxpayers and employees, retirees, police officers and firefighters who depend on the fund.

10. OHIO LAWMAKERS MAY ADDRESS STATE SYSTEMS’ FAILURE TO DISCLOSE RECORDS:  Two Ohio state lawmakers want to open up state retirement records to public scrutiny after the Cleveland Plain Dealer and seven other Ohio newspapers were denied access to the information.  The proposal comes after the state's public employee pension systems refused a public records request from the newspapers for details of contributions and benefits of their 400,000 recipients.  The eight newspapers requested records of salaries, benefits, ages, years of service and contributions to the systems by individual for each of the 400,000 people receiving benefits.  The newspapers asked the systems to withhold names, addresses and any information that would identify individuals.  The newspapers say they want to analyze data for possible flaws or abuses in the pension system before the state legislature votes on having taxpayers cover more costs.  All five state pension systems declined the request, saying disclosure would violate privacy of members.  At least 21 states consider financial benefits for retirees to be public records.  At least 26 states prohibit release of such information.  The lawmakers say any proposed change to increase access to retirement records would aim to balance public accountability with privacy concerns, especially those of former law enforcement officers. 

11. GEOGRAPHY OF A RECESSION:  Watch the U.S.’s unemployment rates by county go from 4.6% in January of 2007 to 9.7% in May of 2010 -- graphically -- in 38 seconds at

12. HOUSE COUNSEL/VERIZON DODGE $1.67 BILLION BULLET:  People make mistakes.  Even administrators of ERISA plans.  This introduction was fitting in a recent case before the U.S. Seventh Circuit Court of Appeals.  In fact, it is perhaps an understatement in the case, which involves a devastating drafting error in the multi-billion-dollar plan administered by Verizon Communications, Inc.  Verizon's pension plan contained erroneous language that, if enforced literally, would give Verizon pensioners like Young greater benefits than they expected.  Nonetheless, Young  sought these additional benefits based on ERISA's strict rules for enforcing plan terms as written.  Although Young raised some forceful arguments, the appellate court concluded that ERISA's rules are not so strict as to deny an employer equitable relief from the type of “scrivener's error” that occurred here.  Accordingly, the district court's judgment granting Verizon equitable reformation of its plan to correct the scrivener's error was affirmed.  In drafting language concerning a conversion formula in the Plan, one of Verizon's in-house attorneys attempted to restructure the language into a more readable "A times B" format, but in doing so, neglected to delete a trailing clause from a previous draft that referred to "the applicable Transition Factor." The attorney testified in the trial court, admitting that he had made this mistake in failing to delete the trailing clause, thereby duplicating the transition factor.  (Prior to Young’s lawsuit, not a single employee complained that opening balances should have been increased by an additional transition factor.)  The issue on appeal was whether Verizon’s claim for equitable reformation under of cash balance plan was the type of equitable relief authorized by ERISA.  The appellate court concluded that ERISA authorizes equitable reformation of a plan that is shown, by clear and convincing evidence, to contain a scrivener's error that does not reflect participants' reasonable expectations of benefits.  The court rejected Young’s defenses of "good faith/fair dealing," "unclean hands" and laches (unreasonable delay) by Verizon in seeking equitable reformation.   Young v. Verizon's Bell Atlantic Cash Balance Plan, Case Nos. 09-3872 and 09-3965 (U.S. 7th Cir., August 10, 2010). 

13. RUSSELL WINS BATTLE OF THE INDICES: has released a chart showing that Russell wins the index battle among large public pension plans.  Of the 50 largest public pension plans, 27 use a Russell Index as a domestic equity benchmark.  S&P is in second place, with 17. 

14. NEW YORK CITY SUED OVER LOST $187,000 BELT!:  A linen company chief executive officer says New York City police lost his $187,000 bejeweled belt buckle, and his insurer wants the city to pay for it. reports that a lawsuit said police took George Bardwil's diamond-and-emerald-encrusted gold belt buckle while arresting him in May 2009 on a charge he hit his housekeeper; he later pleaded guilty.  The Bardwil Industries Inc. CEO was told police could not find the buckle to return it upon his release, the lawsuit said.  Chubb says it covered his claim for the lost buckle, and is suing to try to recoup its money from the city.  Bardwil, 58, punched the housekeeper in the head so hard that she ended up hospitalized in intensive care.  He initially told police he had found her lying on the floor, but then admitting hitting her because of some missing money.  The company sells tablecloths, bath towels and other items under the Tommy Bahama brand name.  No sheet. 

15. APPELLATE COURT STAYS GAY MARRIAGE RULING:  In a terse two-page order, the United States Court of Appeals for the Ninth Circuit has granted appellants’ motion for a stay of the district court’s order from August 4, 2010 pending appeal (see C&C Newsletter for August 12, 2010, Item 1).  On its own, the court ordered that the appeal be expedited and be calendared during the week of December 6, 2010.  The opening brief is now due September 17, 2010, the answering brief, October 18, 2010, and the reply brief, November 1, 2010.  In addition to any issues appellants wish to raise on appeal, appellants are directed to include in their opening brief a discussion of why the appeal should not be dismissed for lack of Article III standing.  (Remember that the state officials who are defendants chose not to defend the case and will not be filing an appeal.)  Perry v. Schwarzenegger, Case No. 10-16696 (U.S. 9th Cir., August 16, 2010).
16. ALL PUNS INTENDED:  And finally, there was the person who sent twenty different puns to his friends, with the hope that at least ten of the puns would make them laugh. No pun in ten did. 

17. OXYMORON:  Why do they call it a TV set when you only have one? 

18. AGING JOKES:  Reporters interviewing a 104-year-old woman: "And what do you think is the best thing about being 104?" the reporter asked. She simply replied, "No peer pressure." 

19. FABULOUS RANDOM THOUGHTS:  Sometimes I'll look down at my watch 3 consecutive times and still not know what time it is. 

20. QUOTE OF THE WEEK:  “I don’t like money, but it quiets my nerves.”  Joe Louis 

21. KEEP THOSE CARDS AND LETTERS COMING:  Several readers regularly supply us with suggestions or tips for newsletter items.  Please feel free to send us or point us to matters you think would be of interest to our readers.  Subject to editorial discretion, we may print them.  Rest assured that we will not publish any names as referring sources. 

22. PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you. 

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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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