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Cypen & Cypen
DECEMBER 30, 2010

Stephen H. Cypen, Esq., Editor

1.      RETIREMENT SCHEMES LEAVE PUBLIC EMPLOYEES VULNERABLE:   Writing on, Dave Lowe says the Grinch is definitely working overtime this holiday season, cooking up different ways to deflect blame from Wall Street for the economic collapse and place it on the backs of hard-working peace officers, recreation workers, child care helpers, firefighters, nurses and others who provide vital public services.   One lump of coal is a new proposal to eliminate retirement security altogether by forcing all public employees into a risky 401(k)-style plan that leaves them vulnerable to the same financial shenanigans that caused the economic crash.  Other lumps of coal include proposals for hybrid systems that will put more money into the pockets of Wall Street bankers than into a secure retirement for California's dedicated public employees.   Apparently, the average public employee working 20 years and receiving a retirement of $2,300 per month is just too much, despite the fact that many of these retirees have no Social Security benefits.  These schemes fly in the face of the collaborative approach being taken by public employees across California, who have been bargaining significant reforms and concessions that save money and eliminate problems that allow some individuals to game the system.   There is no one-size-fits-all remedy to the economic woes; but the wrong answer is to scapegoat public employees and ignore the fact that the Wall Street debacle has put the retirement security of all Americans at risk.  Public employees recognize that in uncertain economic times everyone has to share the cost of strengthening the state.  Around the state, public employees are negotiating higher retirement ages and increases to their pension contributions.  In California, for example, a state employee who makes $60,000 per year will take home $3,000 less in 2011 because he will pay more into his retirement as part of the effort to cut costs.   But while public employees are working cooperatively with their employers to find solutions, they will not allow any Grinch to steal this or any other Christmas.  Public employees will continue to work hard to protect their retirement security, just as they work hard every day to provide service to the people of California. 

2.      TOWERS WATSON-FORBES INSIGHTS 2010 PENSION RISK SURVEY: Pension plan sponsors in the United States are seeking more effective management and pension risks through better investment and funding strategies and implementation, according to the Towers Watson-Forbes  Insights 2010 Pension Risk Survey. The survey includes responses from more than 300 executives who are in charge of pension finance at large companies. Results provide new insights about the current trends and practices of pension plans. There is no sign that decline in sponsorship of active defined benefit plans has reversed.  Neither is the extinction of DB plans imminent.  Instead, the survey shows that most sponsors of active plans will continue to provide retirement benefits, although many will cut back on benefits, and some are indeed seeking to close or freeze.  The task for pension plan sponsors is to take action to manage risk and reduce liabilities. There is a strong desire on part of plan sponsors to reduce risk of their pension plans.  Many plans are significantly underfunded in the aftermath of the financial crisis, and their sponsors have experienced resulting pressure on corporate cash flows.  Rather than rushing to seek higher investment returns to close this funding gap, however, most sponsors attach greater importance to reducing risk.  The most favored strategy is to seek a better alignment of assets with liabilities, for example, through liability-driven investment programs.  Executives expect increasingly to utilize swaps, options and other hedging derivatives to achieve better risk management. More plan sponsors today are setting formal funding policies in place of ad hoc decisions. 

3.      PENNSYLVANIA SUPREME COURT UPHOLDS RETIREMENT BOARD PENSION CALCULATION: The Pennsylvania Supreme Court has ruled that governing language in a police pension plan is ambiguous, and the calculation proposed by two former police officers could lead to manipulation. The court unanimously ruled that a process of calculating pensions on the average amount of pay over the final twelve months preceding retirement was more reasonable than a calculation based on final month’s pay. The officers supported their argument by reference to plan language stating that pensions are to be based upon the higher of an officer’s rate of monthly pay at date of retirement or the highest average annual salary during any five years of service preceding retirement. In making its ruling, the Pennsylvania high court recognized relevance of the presumption that the legislature intends to favor public over private interests and a competing precept that social legislation, such as conferral of police pensions, is to be construed liberally in favor of its intended beneficiaries. Nevertheless, the city’s calculation practice comports with the reasonable construction of the plan. There is simply too much opportunity for arbitrariness, disparity and manipulation – arising from a system that contemplates a single month’s total gross compensation as the litmus for lifetime pension benefits – to infer that the legislature contemplated such a scheme. Gontarchick v. City of Pottsville, Case No. 101 MAP 2009 (Pa. Cmwlth., December 21, 2010). 

4.      GOVERNMENTAL IRC §403(b) PLANS NOT SUBJECT TO TITLE I OF ERISA: A tax-sheltered annuity program under Section 403(b) of the Internal Revenue Code is a retirement plan for employees of public schools, employees of certain tax-exempt organizations and certain ministers. Under a 403(b) plan, employers may purchase for the eligible employees annuity contracts or establish custodial accounts invested only in mutual funds for the purpose of providing retirement income. An annuity contract must be purchased from a state licensed insurance company, and the custodial accounts must be held by a custodian bank or IRS approved non-bank trustee/custodian. The annuity contracts and custodial accounts may be funded by employee salary deferrals, employer contributions or both. While a Section 403(b) plan is clearly a retirement plan and would be considered an “employee pension benefit plan” established or maintained by a 501(c)(3) tax-exempt employer, Section 403(b) plans established by school districts are exempted from the Employee Retirement Income Security Act of 1974 by the “governmental plan” exception. It is undisputed that public school districts are political subdivisions of the various states, and are therefore governmental entities. Daniels-Hall v. National Education Association, Case No. 08-35531 (U.S. 9th Cir., December 20, 2010). 

5.      SLUSA DOES NOT AUTHORIZE INJUNCTION AGAINST PRIVATE SECURITIES PLAINTIFF’S ACCESS TO RECORDS UNDER PUBLIC-RECORDS LAW: The Private Securities Litigation Reform Act of 1995 provides that all discovery and other proceedings shall be stayed during pendency of any motion to dismiss a suit governed by the Act. The Securities Litigation Uniform Standards Act of 1998 amended PSLRA to authorize the district court to stay discovery proceedings in any private action in a State court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments in an action subject to a stay of discovery pursuant to PSLRA. In a recent appeal before the U.S. Seventh Circuit Court of Appeals, the question presented was whether that provision of SLUSA authorized the district court to enjoin a private securities plaintiff from gaining access to records that a state's public-records law entitled members of the public to see and copy at their own expense.  American Bank filed a class-action against the City of Menasha, Wisconsin, charging that it had violated federal securities laws by failing to disclose to prospective buyers of bonds material information. Two weeks after the suit was filed, the bank submitted a request to the city, pursuant to Wisconsin's Public Records Law, to inspect a large number of records relating to the project for which the bonds had been issued.  The city responded to the bank’s request by asking the district court for a stay under SLUSA, which the court granted. On appeal by the bank, the appellate court reversed. The purpose of authorizing stays of discovery is to prevent settlement extortion -- using discovery to impose asymmetric costs on defendants in order to force a settlement advantageous to the plaintiff regardless of the merits of the suit. But the concern with settlement extortion does not justify the interpretation urged by the city. For as is typical of public-records statutes, costs associated with responding to requests for access to public records under Wisconsin's public-records law are charged to the person making the request. Further, the city acknowledged that had the bank requested the records before filing suit, there would have been no ground for refusing the request. So, the only effect of affirming the district court would be that in the future, private securities plaintiffs would file their public-records requests before rather than after filing suit. American Bank v. City of Menasha, Case No. 10-1963 (U.S. 7th Cir., November 29, 2010). 

6.      IDENTIFYING A SPONSOR’S IMPACT ON TOTAL RETURNS: Morningstar has released a White Paper entitled “Identifying A Sponsor’s Impact on Total Returns – Performance Attribution for the Total Portfolio.” (For purpose of this review, we equate “sponsor” with board of trustees.) For many years, sponsors and investment consultants have embraced performance attribution as a tool for evaluating investment managers. It is easy to see why: both an analytical and communications tool, attribution analysis decomposes an investment manager’s return versus the benchmark into pieces to explain the impact of decisions an investment manager makes, helping a sponsor to distinguish between luck and skill. Attribution is also one of an investment manager’s most powerful tools for understanding and communicating performance drivers to investors and consultants. Attribution analysis has become an essential part of the quarterly performance-update meeting between investment managers and sponsors, identifying and conveying which countries, sectors and securities were top contributors and which detracted value. Intimately familiar with benefits of performance attribution analysis, some sponsors have applied it to evaluate their own investment decisions to describe the value they add to total returns. The consulting field has also broadened application of such self-evaluation to wealth advisors, managed accounts and funds-of-funds (such as target-date funds). Also known as macro or balanced attribution, total portfolio attribution enables sponsors to: 

  • Identify performance attributable to strategic asset allocation policy
  • Examine outcome of deliberate deviations from policy weights
  • Measure manager-picking skill in aggregate by asset class or investment style

The paper discusses methodology for conducting total portfolio attribution and outlines seven critical challenges sponsors must consider when evaluating their options. 

7.      MASSACHUSETTS FUND INVESTED IN RAIDED FIRMS: When the FBI raided three hedge funds last month, Massachusetts pension officials were not immediately sure if they had a problem. But by the end of the day, according to the Boston Globe, they knew they potentially did:  the pension fund had nearly $66 Million invested with two of the firms swept up in an insider-trading investigation.  The money was in so-called funds-of-funds, vehicles that invest across many hedge funds but disclose little about exactly where the money ends up.  Although the funds at stake represent just 2 percent of the $46.8 Billion pension fund, the raid exposed potential risks that institutions take when they turn control of their investments over to these funds for the promise of higher returns. Not knowing what is in these portfolios can surprise and hurt the state.  In 2008, for instance, the pension fund lost $12 Million when another fund-of-funds, Austin Capital Management, invested with Bernard Madoff, mastermind of the largest Ponzi scheme of all time.  In 2007, the state lost $30 Million with the collapse of Sowood Capital Management, and it lost $50 Million in the failure of Amaranth Advisors the year before. True, the state has not lost money as a result of the fund raids.  Nevertheless, at issue is whether the funds-of-funds are working hard enough to find lucrative investments to justify their fees.  The state pays five firms about $35 Million annually carefully to place money in hedge funds for 290,000 current and former state employees, and to monitor those investments. Obviously, things do not always work out as intended.  Besides, even performance has been disappointing. The funds-of-funds have returned a combined 3.7 percent over the five years ended October 31, better than the broad stock market but less than the 6.5 percent benchmark for the hedge fund portfolio.  Even during the last 12 months, although hedge funds were up 6.5 percent, stocks far outshone them, with a 16.5 percent gain. 

8.      SOCIAL SECURITY REVISES WITHDRAWAL POLICY: The Social Security Administration has published final rules, effective December 8, 2010, that limit the time period for beneficiaries to withdraw an application for retirement benefits to within 12 months of the first month of entitlement and to one withdrawal per lifetime.  In addition, beneficiaries entitled to retirement benefits may voluntarily suspend benefits only for the months beginning after the month in which the request is made. The agency is changing its withdrawal policy because recent media articles have promoted use of the current policy as a means for retired beneficiaries to acquire an "interest-free loan."  However, this "free loan" costs the Social Security Trust Fund use of money during the period the beneficiary is receiving benefits with the intent of later withdrawing the application and interest earned on these funds.  Processing of these withdrawal applications is also a poor use of the agency's limited administrative resources in a time of fiscal austerity -- resources that could be better used to serve millions of Americans who need Social Security's services. Although the new rules are effective immediately, the agency is providing for a 60-day public comment period after which the agency will consider relevant comments received and publish another final rule to respond to comments and to make any appropriate changes to the rule. SSA-2009-0073

9.      FLORIDA AMONG TOP FIVE HOME STATES TO AMERICA’S ULTRA-WEALTHY:  Sure, Florida has long been known as "where the boys are" and plain old millionaires are nearly a dime a dozen these days.  But, according to, Florida is also not a bad place to find the "ultra-wealthy," those with $30 Million or more investable assets. A new report ranks Florida fourth among states in number of super-rich residents who claim primary residence here.  In all, there are 3,526 ultra-wealthy Floridians, behind California (9,872), New York (7,327) and Texas (5,283) but ahead of Illinois (2,446), Michigan (1,533) and Pennsylvania (1,515). Of the nearly 55,000 ultra-high-net-worth individuals living in the United States, more than half keep their primary residence in just five states.  On the other hand, with the exception of Alaska, Delaware and North Dakota, all states have more than 100 ultra-high-net-worth residents. We guess the super-rich do not spread the wealth…in any fashion. 

10.    TOP 10 RESUMÉ BUZZWORDS TO AVOID:  You may be “results oriented” and “motivated,” but you probably should leave those words off your resumé. Frequently used terms can appear empty to a potential employer and may do more harm than good. Here are the top 10 most clichéd and overused phrases: 

  • Extensive experience
  • Innovative
  • Motivated
  • Results-oriented
  • Dynamic
  • Proven track record
  • Team player
  • Fast-paced
  • Problem solver
  • Entrepreneurial

Here is one we came up with:   Jobless. 

11.    INTERNET RETAILER WHO SCARED CUSTOMERS IS ARRESTED: An Internet retailer who said he mistreated customers for better Google search results has been charged with cyberstalking, according to Vitaly Borker was charged after a customer told the New York Times about an alleged campaign of intimidation spurred when she tried to return the glasses she bought from The woman had told the Times that her complaints led to threats of se.xual assault, reinforced by a photo she received showing the front of her apartment building.  Borker told the Times that scaring customers improved his Google search results, because the company was unable to distinguish between praise and complaints.  Google has since changed its search formula. Borker was charged with mail fraud, wire fraud, making interstate threats and cyberstalking. He is accused of making night-time calls threatening se.xual assault to one customer, and sending an e-mail to the employer of another customer that claimed its employee was gay and involved in drug sales.  He is also accused of selling counterfeit goods and making unauthorized credit card charges. U.S. Postal inspectors found guns in a search of Borker's home, but Borker's lawyer said they were just movie props. A U.S. District Judge in Manhattan denied bail, saying Borker was either “verging on psychotic” or had “an explosive personality.” Query: if this creep had (an apparently successful) scam going, why would he tell the New York Times about it?   

12.    LARRY DAVID SAYS “THANKS FOR THE TAX CUT!”:   Larry David appears in the HBO series Curb Your Enthusiasm. He was also the comic genius behind Seinfeld. In an Op-Ed piece for the New York Times David says there is a God! It passed! The Bush tax cuts have been extended two years for the upper bracketeers, of which he is a proud member, thank you very much. He is the last person in the world he would want to be beside, but he is beside himself. This is a life changer. Read the entire piece at

13.    REMARKABLE QUOTES FROM REMARKABLE JEWS: The time is at hand when the wearing of a prayer shawl and skullcap will not bar a man from the White House, unless, of course, the man is Jewish.   Jules Farber

14.    BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  Some people are alive only because it's illegal to kill them. 

15.    AGING JOKES:  I've tried to find a suitable exercise video for people my age, but they haven't made one called "Buns of Putty." 

16.    FABULOUS RANDOM THOUGHTS:   While watching the Olympics, I find myself cheering equally for China and USA . No, I am not of Chinese descent, but I am fairly certain that when Chinese athletes don’t win, they are executed.

17.    QUOTE OF THE WEEK:   “It’s natural to have butterflies – the secret is to get them to fly in formation.” Walter Cronkite

18.    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. 

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We wish you and yours a very happy, healthy and prosperous New Year!!!!

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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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