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Cypen building

October, 1999

Stephen H. Cypen, Esq., Editor

1. TEN THINGS INVESTMENT NEWSLETTERS WON'T TELL YOU: Smart Money Magazine contains a short piece entitled "Ten things investment newsletters won't tell you." No. 1, "we own these stocks and we're hoping you'll bid them up;" the practice is called "front running," and it's illegal. No. 2, "we're paid by the companies we recommend;" known as "touting," the practice has drawn enforcement actions by the SEC. No. 3, "our celebrity editor is AWOL;" people whose names head newsletters often have little or nothing to do with them. No. 4, "we want to get our hands on your money;" some newsletters exist only as vehicles for getting subscribers signed up as money management clients. No. 5, "we'll chew your ear off;" some newsletters are more interested in saving your soul than in making you money. No. 6, "we're no better at picking stocks than you are;" less than 20% of newsletter picks actually beat the S&P 500 consistently. No. 7, "we take huge risks;" although some newsletters' large returns are genuine, if you factor in the risks, the results don't seem impressive. No. 8, "don't believe our hype;" newsletters are not governed by strict rules on how mutual funds and money managers can advertise their track records. No. 9, "I have a Ph.D. ... in education;" anyone with a roll of stamps, a computer and a mailing list can start a newsletter. No. 10, "hope you like junk mail;" sign up for some newsletters and expect your name and address to be sold or rented to others. You will notice that none of the foregoing things apply to our newsletter.

"How much can I get away with and still go to heaven?"

2. AMERICA'S BEST COMPANY BENEFITS: Money Magazine has listed companies with the best benefits. From a poll of Fortune 100 companies, rankings were based on the following six key factors for nonunion employees: pension payout formula; matching contributions to tax-deferred savings plans; average cost to employees of health care for a family of four; employees' eligibility for stock options; and free long-term disability and life insurance benefits. The top ten are Philip Morris, Procter & Gamble, Xerox, Intel, TIAA-CREF, Dell Computer, Chevron, Boeing, BellSouth and Duke Energy. According to the magazine, Philip Morris does it all: the employer makes annual contributions equal to 13-15% of an employee's pay and employees can put an additional 8% of salary into a tax-deferred savings plan. The company also provides a traditional pension. Family health coverage is $77.00 for fee-for-service, HMO and point-of-service plans. There is even an employer-sponsored health plan for retirees. Finally, employees receive free life insurance with a death benefit equal to twice annual salary, with no cap. Top and middle managers also receive stock options.

3. RETIREMENT PLAN NOT REQUIRED TO HONOR IRS LEVY UNLESS TAXPAYER IS ENTITLED TO DISTRIBUTION: In a recent Field Service Advice Memorandum (FSA 199930039), the Internal Revenue Service has determined that a retirement plan is not required to honor an IRS levy unless the subject taxpayer is entitled to an immediate distribution from the plan. Of course, the levy would apply to the taxpayer's vested right to future benefits. The levy would be enforceable at such time as the taxpayer becomes eligible to receive the benefits.

4. CALIFORNIA EMPLOYEES GET EXPANDED USE OF ACCRUED SICK LEAVE: A report from Buck Consultants, Inc. tells us that California has enacted a new sick leave law. Effective January 1, 2000, Assembly Bill 109 will require all California employers that provide sick leave to allow employees to use their accrued sick leave to attend to the illness of a child, parent or spouse. In any calendar year, employees may use their accrued and available sick leave for the foregoing purposes in an amount not less than the leave that would accrue during a six-month period. The law specifically provides that the maximum period of leave under the federal Family and Medical Leave Act is not extended.

5. SEC FINALLY ISSUES "PAY-TO-PLAY" PROPOSAL: The Securities and Exchange Commission on August 4, 1999 issued a proposed ruling on "pay-to-play" practices in the public pension arena. The issue, dealing with the practice of requiring service providers to make political contributions to officials in order to be considered for work, has been on the front burner for several months (see C&C Newsletter for February, 1999, Item 2 and C&C Newsletter for March, 1999, Item 12). IA-1812 would prohibit an investment adviser from providing advisory services to a government client for two years if that adviser contributes to certain elected officials or candidates. The proposed ruling follows Rule G-37, the SEC rule that since 1994 prohibits municipal bond dealers and brokers from engaging in pay to play. A copy of the rule can be obtained at

"To succeed in politics, it is often necessary to rise above your principles."

6. SO GARY FINDLAY USES "PAY-TO-PLAY" FORUM TO CHALLENGE SEC ON SOFT-DOLLAR ISSUE: Gary Findlay, Executive Director of the Missouri State Employees' Retirement System, is not too thrilled with the concept of "soft dollars" (see C&C Newsletter for February, 1999, Item 8). So what better time is there than the present to challenge the SEC's position on soft dollars? In a memorandum dated August 17, 1999 addressed to the SEC, the irrepressible Mr. Findlay says: "The pay to play rules, as proposed, will, if adopted, address a problem which is infinitesimal in the grand scheme of things. However, if that is needed as a first step, then that is a call you must make. The much bigger question which remains is when will the SEC address the insidious transactions which pervade the industry and which make pay to play (as described in the proposed rules) look more like child's play? I am speaking here of soft dollar abuses and relationships between money managers and investment consultants (gatekeepers), which lead to kickbacks, self dealing, and extortion that go completely undisclosed and cry out for regulatory attention." Tell us how you really feel, Gary.

"A penny a day keeps the brokers away."

7. BJORKMAN BLASTS FRS PLAN TO INCREASE INDEXING: Russell Bjorkman, a firefighter who is Chairman of the City of Miami Fire Fighters' and Police Officers' Retirement Trust, is also one of Governor Jeb Bush's appointees to the Florida Retirement System's six-member Investment Advisory Council. At just under $100 Billion, FRS is the fifth largest public fund in the country, with about 57% of its domestic equity portfolio invested in indexes. The Florida debate over active versus passive management has been raging for about a year (see C&C Newsletter for November, 1998, Item 6). Mr. Bjorkman believes indexing gives too much weight to particular highflying stocks, especially in technology sectors, at a time when equity markets seem vulnerable to downturns. He suggests that the effort to boost FRS's indexing is an attempt by the Executive Director to mask his own lack of investment experience, and he will "fight like a son of a gun" against it. The story was important enough to have been reported by The Wall Street Journal.

8. REMINDER TO PENSION TRUSTEES -- TAKE AN OATH: The Florida Attorney General recently issued an opinion that appointed members of advisory committees and boards, serving as volunteers without compensation, are not required to take the statutory oath prescribed by Section 876.05, Florida Statutes (AGO 99-57, September 22, 1999). So we thought it might be a good opportunity to remind pension board trustees that they are required to take that oath: "I,           , a citizen of the State of Florida and of the United States of America, and being employed by or an officer of            and a recipient of public funds as such employee or officer, do hereby solemnly swear or affirm that I will support the Constitution of the United States and of the State of Florida." At first blush, one might think a pension board trustee is neither "employed" nor "a recipient of public funds." However, Section 876.09, Florida Statutes, provides that the oath requirement applies to "all employees and elected officers of this state, including the Governor and constitutional officers and all employees and elected officers of any cities, towns, counties and political subdivisions, including the educational system." Because pension boards are not "advisory" and because Section 112.313(1), Florida Statutes, does not limit the term "public officer" to elected officials, we believe pension board trustees should take an oath.

9. IN ORDER TO BE AWARDED ATTORNEY'S FEES, ADA PLAINTIFF MUST OBTAIN DIRECT BENEFIT FROM RELIEF ORDERED: A rejected applicant for the position as detention deputy sued the sheriff for injunctive relief pursuant to the Americans With Disabilities Act (ADA), 42 USC §12201, et seq. In granting summary judgment for plaintiff the trial court permanently enjoined the sheriff from continuing the practice of conducting the challenged pre-employment psychological testing. Nevertheless, plaintiff's claim for attorney's fees was denied. In affirming that particular ruling, the U.S. Eleventh Circuit Court of Appeals concluded that an ADA plaintiff who obtains injunctive relief that does not directly benefit him at the time the court-ordered relief is imposed does not constitute a prevailing party for purposes of the applicable fee-shifting provision. Here, the trial court found that plaintiff did not prove discrimination under ADA, and even if he had, he failed to proffer sufficient evidence to give rise to a reasonable inference that the sheriff's stated legitimate reasons for not hiring him were pretextual. Barnes v. Broward County Sheriff's Office, Case No. 98-4259 (U.S. 11th Cir., September 30, 1999).

10. IRS PENSION LIMITS OFFICIAL: The Internal Revenue Service announced on October 19, 1999 (IR-1999-80) that dollar limitations for pension plans for the year 2000 are official. As predicted (see C&C Newsletter for September, 1999, Item 3), the Section 415 defined benefit plan dollar limitation will increase from $130,000.00 to $135,000.00. The Section 415 defined contribution limit will remain, for the third year, at $30,000.00. The annual compensation limit, Section 401(a)(17), will increase from $160,000.00 to $170,000.00. And the deferred compensation limit, Section 457, will be unchanged at $8,000.00.

"Change is inevitable except from vending machines."

11. LEAGUE CIRCULATES FIREFIGHTER/POLICE OFFICER PENSION LAW ANALYSIS: In a Memorandum dated September 17, 1999 to Florida's city and town attorneys, the Florida League of Cities has circulated a 28-page analysis and compliance strategies concerning Chapter 99-1, the legislation amending Chapters 175 and 185, Florida Statutes. While the analysis is for the most part accurate -- and does contain a useful history -- it does represent the League's slant on the subject. But there are some parts with which we disagree. We have enclosed a copy of said analysis and compliance strategies with Newsletters mailed to our clients. If a reader wants one, let us know and we will provide a copy to you.

12. COURT DECLINES TO APPOINT FRS AS LEAD PLAINTIFF, BUT NOT FOR REASON URGED: We recently reported on the Florida Retirement System's attempt to obtain lead plaintiff status in the Telxon Corporation Securities litigation (see C&C Newsletter for July, 1999, Item 15). The United States District Court for the Northern District of Ohio has declined to appoint FRS as lead plaintiff, but not because fiduciaries are barred from serving as lead plaintiffs in class action lawsuits. FRS was rebuffed because (1) it did not suffer the greatest financial loss of those seeking to become lead plaintiff and (2) FRS was presumptively barred by the Private Securities Litigation Reform Act of 1995, which expressly prohibits a person from serving as lead plaintiff in more than five securities class actions during any three year period. FRS had argued that the legislative history of the PSLRA establishes that such prohibition was not intended to apply to institutional investors. Incidentally, the Attorney General of Florida had previously concluded that FRS had authority under state law to pursue federal securities law claims arising out of the purchase of securities and to represent the interest of its beneficiaries. Informal Legal Opinion Letter issued by the Florida Attorney General's office on June 22, 1999.

"Not always right, but never in doubt."

13. THE EVER-CHANGING S&P 500 INDEX: Last month (Item 5) we discussed how companies listed in the S&P 500 had changed over the years. So we thought it might be interesting to compare how the largest ten companies had changed from five years ago. The following represent August 31, 1999 values.

Five Years Ago


$in Millions
$in Millions


1Microsoft472,4264.36     1General Electric88,4012.64
2General Electric367,4733.39     2AT&T80,0872.39
3Intel242,6982.52     3Exxon76,2282.27
4IBM226,0612.08     4Coca-Cola67,4462.01
5Cisco216,6202.00     5Royal Dutch Pet.58,0301.73
6Wal-Mart197,1971.82     6Wal-Mart50,0061.49
7Lucent194,7411.80     7Philip Morris49,1951.47
8Exxon191,4921.77     8Merck48,7101.45
9Merck158,6001.46     9IBM43,6711.30
10Citigroup150,1601.38     10Procter & Gamble42,8261.28

14. SOCIAL SECURITY BENEFITS WILL INCREASE BY 2.4%: Unlike last year, which saw the smallest increase in over ten years (see C&C Newsletter for November, 1998, Item 8), retirees will get the biggest cost-of-living increase in Social Security in three years. The average monthly check will rise by $19.00, from $785.00 to $804.00. The maximum annual earnings subject to the 6.2% Social Security payroll tax will rise to $76,200.00 from $72,600.00. For those over age 65 who continue to work but also collect a Social Security check, the maximum amount of yearly earnings allowed without triggering a reduction in benefits will increase to $17,000.00 from $15,500.00. For those ages 62 to 65 who collect early retirement benefits but still work, the earnings limit will rise of $10,080.00 from $9,600.00. Separately, the government also announced that the monthly Medicare premium for Medicare Part B will remain at $45.50 for the year 2000.


Callable Bond A bond that can be redeemed by the issuer prior to maturity. If interest rates drop significantly below a callable bond's coupon, the issuer may call the bond and refinance at a lower rate. Thus, callable bonds expose bondholders to reinvestment risk, so, bond investors should receive compensation for this risk in the form of higher yields.

Capital Goods A sector classification that includes securities of firms involved in the production of other goods -- industrial buildings, machinery, equipment -- as well as highways and government installations. In the aggregate, such goods form a country's productive capacity.

Capitalization Market value multiplied by number of shares of outstanding common stock.

Cash Equivalents Fixed income securities that are highly liquid, with a known market value and a maturity, at acquisition, of less than three months.

Collateralized Mortgage Obligation A security that groups mortgage pass-through bonds together and partitions the cash flows into successive maturity groups called tranches. CMOs attempt to mitigate prepayment risk by allocation among different tranches, since each tranch has different risk and return characteristics.

Commingled Fund An investment fund in which a manager pools assets of several accounts to permit more efficient management and to reduce administrative costs. Other names are collective investment funds, common funds or pooled funds.

Confidence Level The degree of certainty associated with a statistical measure.

Consumer Durables A sector classification that includes securities of firms whose products, bought by consumers, are expected to last three years or more. These items include automobiles, appliances, boats and furniture. Economists look at the trend in consumer expenditure on durables as an important indicator of the strength of the economy, since consumers need confidence to make such large and expensive purchases.

"Don't let school interfere with your education!"

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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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