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Cypen & Cypen
NOVEMBER 4, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


An opinion piece in the Daily Business Review says that investing should include protection from “event risk.” Obviously, the danger of sudden calamitous news hitting a given company, or even a whole industry, cannot be ignored in any investment plan. (If nothing else, people like Eliot Spitzer have seen to that.) The New York Attorney General, fresh from investigations of Wall Street analysts and mutual fund managers, dropped a bombshell in mid-October, arresting two American International Group employees and suing Marsh & McLennan Cos. over fees insurers paid to insurance brokers. In one week, Marsh’s shares dropped 46% and AIG’s stock fell 14%. Event risk defies forecasting, although some ambitious minds never stop trying. If event risk cannot be quantified or even seen, how can an investment portfolio protect against it? The choices range from simply bearing the risk -- which means investing money that can willingly be lost -- to hedging it with offsetting positions. While hedging has numerous uses, its chief limitation is the tendency to shrink the potential reward in tandem with whatever risk reduction it achieves. At the extreme, investors long and short the same amount of a stock-market index will hold positions that cannot lose money, but the cost of buying, owning and selling means there cannot be any profits either. Somewhere in between no protection and a 100% hedge lies diversification, the most popular means of managing investment risk and a cardinal virtue of broad-based investing. Diversification? where have we heard that before?


Adamides was injured in the course and scope of his employment as a City of Miami Firefighter on July 12, 1969. Subsequently, he was granted a disability retirement pension. Back then, Section 440.09(4), Florida Statutes (1969), provided:

When any employee of the state...or quasi-public corporation therein...receives compensation under the provisions of this chapter by reason of the disability...of such employee resulting from an injury arising out of and in the course of employment with such employer, and such entitled to receive any sum from any pension or other benefit fund to which the same employer may contribute, the amount of any payment from such pension or benefit fund allocable to any week with respect to which such employee...receives compensation under this chapter shall be reduced by the amount of the compensation for such week... .

(That said section was repealed in 1973 is of no moment, because the statute in effect on date of the accident controls the rights of the parties.) In any event, the Judge of Compensation Claims denied Adamides’s claim for workers’ compensation benefits over and above his disability pension. On appeal, the First District Court of Appeal affirmed. Considering Section 440.09(4), Florida Statutes, in its entirety, the legislative intent seems clear: an employee shall not receive both a pension and workers’ compensation from his employer when the employer is the state or any political subdivision thereof. Inasmuch as the statute was repealed more than thirty years ago, the facts of this case make it unlikely that we will see other, similar decisions. Besides, we know that the Florida Supreme Court decision in Barragan v. City of Miami, 545 So.2d 252 (Fla. 1989), limits ordinance-imposed offsets (see C&C Newsletter for September 30, 2004, Item 1). Adamides v. City of Miami, 29 Fla. L. Weekly D2415 (Fla. 1st DCA, October 28, 2004).


Former Maryland state pension fund manager Nathan Chapman, Jr. will do more than seven years in prison and will pay a $5 Million fine for conviction of fraud on the system and looting his own firm (see C&C Newsletter for August 19, 2004, Item 4). reports that Chapman at one time managed more than $100 Million for the Maryland retirement system, which lost nearly $5 Million as a result of Chapman’s shenanigans.


A piece from asks “Can you serve two masters when you are brokering services for a pension fund?” Commissioned pension consultants, who are gatekeepers among pension funds, brokers and money managers, receive less government scrutiny than do mutual funds. Even though they are middlemen advising funds on some $2.4 Trillion in assets, they are poorly policed. A legal (though troubling) practice allows these consultants to pocket several fees from clients and managers, yet the pension funds and future retirees do not benefit from this arrangement. Under present federal law, the consultants are allowed to charge pension funds for their services while also obtaining revenue from money managers in the form of brokerage commissions, conferencing fees and marketing services. The U.S. Securities and Exchange Commission began an investigation of conflicts in the industry, targeting the twenty largest pension consultants, but no report has yet been issued. It would be essential for a pension fund to know how often a consultant pitches specific money managers or funds that have paid the consultant other forms of compensation. Of course, there are myriad factors in investment consulting that need to be considered. However, not enough information about consultant relationship is required to be disclosed, so pension fund trustees cannot make informed decisions.


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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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