Securities and Exchange Commission looking into CalPERS stock purchases
12/28/2013 12:00 AM
12/30/2013 9:35 AM
Federal investigators are looking into allegations that CalPERS violated insider trading laws this year when it purchased $26.6 million in restricted stock and then decided it didn’t need to reverse the trades when they were discovered.
Two sources with knowledge of the Securities and Exchange Commission’s inquiry say on condition of anonymity that it involves stock purchases that the nation’s largest public pension fund made in March, including nearly $24 million in global financial firm JPMorgan Chase & Co. and almost $2.7 million in Access Midstream Partners LP, an Oklahoma-based energy company.
According to an internal memo and a fired employee’s challenge of her termination by CalPERS, some staff at the fund contend that the purchases – and a subsequent decision not to rescind them – calls their managers’ qualifications and judgment into question.
“We wanted to reverse (the trades),” said Ted Nishio, a retiree who worked in CalPERS’ Division of Enterprise Compliance who said he was fired after he told his boss that the fund should quickly act. “But the higher ups said, ‘Let it be.’ ”
SEC officials in San Francisco wouldn’t comment on whether their office is reviewing any activities at CalPERS. Fund spokesman Robert Glazier said CalPERS wouldn’t comment on whether the SEC is making inquiries into fund business or Nishio’s allegations.
Both JPMorgan and Access Midstream were on CalPERS’ internal “restricted company list,” which flags securities that can’t be routinely traded because at least one person at CalPERS has inside information about matters that could affect the companies’ stock price. Examples of such material non-public information include earnings estimates, significant changes in management or operations, and planned mergers or acquisitions.
Major litigation details would also fall into that category, such as the $261 million settlement JPMorgan reached with the state in November to repay CalPERS for mortgage-investment losses underwritten by the bank.
Harvey Pitt, a former chairman of the SEC, said via email that the law does not require stock traders to keep a restricted trades list. Most do, however, to avoid running afoul of securities laws that make insider trading a federal offense punishable by up to 10 years in prison and $1 million per violation.
“And while firms are not required to set up a restricted list,” Pitt said, “if they do, they have to make sure it actually works.”
According to an internal March 22 CalPERS memo, the trades occurred on or about March 14 after CalPERS staff incorrectly coded the restricted stocks while entering them in an investment management program.
A system that looks for inappropriate trades after the fact caught the transactions four days later.
CalPERS disclosed the mistakes in two brief policy violation entries in the March 31 edition of its investments report. It didn’t name the stocks purchased or the money spent on them. New rules were put in place to prevent future restricted-list trades, according to the report.
“Interviews were conducted to confirm whether (investment office) staff involved with the trading had material non-public information” and CalPERS officials “confirmed with the affected staff that they were not in possession of (insider information),” the report concluded.
CalPERS says that no one personally benefited from the trades and that an analysis of their current market value is moot, because it would have put the money into other investments had it not mistakenly purchased the restricted stocks.
JPMorgan shares closed at $50.16 on the New York Stock Exchange on March 14, while Access Midstream ended that day at $39.69 per share. On Friday, they closed at $58.14 and $55.06 respectively, which translates into a combined gain of 18 percent or about $5 million, assuming that CalPERS still holds those shares.
Glazier said the restricted-stock purchases represented a tiny fraction of the 730 trades the fund makes each day, on average, while managing a global equity portfolio worth roughly $145 billion. That the transactions were flagged, he said, proves CalPERS’ multiple systems for catching questionable trades is effective.
“We are pleased that our policies were followed by our staff and our organization,” Glazier said.
Meanwhile, a handful of CalPERS employees in one of the fund’s compliance units saw the transactions differently. According to a whistleblower complaint filed by one of them, Jeanine Carter, some staff worried the fund had unwittingly engaged in insider trading.
Carter, whose allegations are among the public records filed in her challenge of her subsequent dismissal from CalPERS, could not be reached for comment.
She and other employees in the fund’s Division of Enterprise Compliance, which caught the restricted trades, noted that when Alabama’s pension fund accidentally executed an insider trade in 2005, that fund quickly reversed the transaction and paid interest. Unlike CalPERS, Alabama at the time had no program to ward off insider trades.
The SEC complimented Alabama for cooperating with investigators, acknowledging its error and rescinding the trades, as well as for adopting a program to prevent future lapses.
Nishio, who worked with Carter, believed “that’s exactly what should be happening here,” but management rebuffed the suggestion, he said.
The federal review of the CalPERS trade could include the performance of fund employees who oversee trade compliance, said Pitt, the former SEC chairman. In October, for example, the commission sanctioned three investment advisory firms for ignoring problems with their compliance programs.
“The SEC has recently (launched) a new enforcement initiative against compliance officers who do not reflect the important standards the SEC believes such individuals should have,” Pitt said. “Again, this isn’t mandatory, but the SEC has heralded this new initiative, to put compliance officials at investment advisers, like CalPERS, on notice that their performance will be examined.”
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