Calpers Faces Questions Following Investing Veteran’s Abrupt Exit - The Wall Street Journal

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Calpers’s board is scheduled to meet Monday for what is expected to be a tense meeting following the departure of investment chief Ben Meng earlier this month. The pension fund’s headquarters are in Sacramento, Calif.

Photo: Max Whittaker for The Wall Street Journal

By

Heather Gillers

• Biography
• @hgillers
• heather.gillers@wsj.com

and

Dawn Lim

• Biography
• @dawnmlim
• dawn.lim@wsj.com

Aug. 17, 2020 5:30 am ET

Calpers’s investment chief resigned from the biggest U.S. pension fund Aug. 5 amid questions about potential conflicts of interest raised by his personal investments. Now board members are calling for an inquiry into the fund’s handling of the matter.

Several members of the 13-person board are asking when California Public Employees’ Retirement System Chief Executive Marcie Frost learned that the pension fund, under former investment chief Ben Meng, steered money into a firm in which he was personally invested. They also want to know what procedures the $412 billion fund has in place to keep investment officials from running afoul of conflict-of-interest rules.

Calpers’s board plans to meet Monday for what is expected to be a tense discussion among the elected officials and government appointees who make up the board. Mr. Meng’s abrupt exit sent shock waves through the pension fund, which has grappled with chronic turnover and has on hand only about 70% of assets needed to meet future pension promises.

Mr. Meng, unlike predecessors, had investment experience on Wall Street. In his first full year, Calpers reversed a streak of underperformance relative to other large pension plans, earning 4.7% for the 12 months ended June 30 despite losses in the first quarter during the early days of the pandemic. Months before his departure, he had embarked on a push to address Calpers’s shortfall and hit the pension’s ambitious investment target by borrowing against the fund.

The fund this month referred an internal review concerning Mr. Meng’s personal investments to California’s Fair Political Practices Commission, which investigates conflict-of-interest violations, according to a person familiar with the matter.

One focus of the review, launched in April, was Mr. Meng’s personal ownership of Blackstone Group Inc. shares in 2019 during the period Calpers pledged $750 million to a private-equity fund managed by the firm, a person said. Mr. Meng disclosed between $10,001 and $100,000 of shares on forms submitted shortly after he became investment chief in January 2019 and in April of this year.

A Calpers spokesman declined to comment on any role Mr. Meng played in the pension fund’s Blackstone investment.

Ben Meng stepped down as Calpers’s investment chief on Aug. 5.

Photo: Calpers

There is no evidence that Mr. Meng attempted to benefit personally from his work at Calpers. Public officials can run afoul of state law simply by participating in government decisions that create the appearance of a conflict of interest. Tom Byrne, who chaired the New Jersey State Investment Council between 2015 and 2018, said he left the room during discussions on Blackstone and recused himself from decisions involving the firm. The investment firm he runs held shares in Blackstone for clients around that time.

Calpers has faced pressure to avoid the appearance of impropriety ever since a bruising scandal in the 2000s that led Calpers’s former CEO to plead guilty to involvement in a bribery scheme. As an investor, Calpers has pushed companies to practice sound corporate governance.

Calpers asks investment staff to disclose personal investments upon arriving and then annually for the previous year. Individuals take mandatory training on conflicts of interest, and officials have opted to recuse themselves on investments for a variety of reasons, people familiar with the pension’s practices said.

A Calpers spokesperson declined to say whether Mr. Meng’s initial disclosure of Blackstone shares, more than a month before the March 2019 Blackstone commitment, raised any flags for Calpers, or whether the fund took steps to protect him from running afoul of conflict-of-interest rules.

Mr. Meng said at the start of his tenure that he intended to expand Calpers’s private-equity portfolio, a longstanding Calpers goal as the fund seeks to earn annual returns of 7% in an era of low interest rates. Blackstone ranks among the largest private-equity managers.

Calpers didn’t flag any problems with Mr. Meng holding Blackstone shares until 2020, a person familiar with the matter said, and he subsequently sold the stock.

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Institutions can help prevent problems by monitoring investments, pre-screening decisions and flagging potential conflicts for officials in real time, experts said.

“If you’re going to say [officials] can continue to own stock, proactively be involved,” said Robert Rizzi, a partner with the law firm Steptoe & Johnson LLP who teaches government ethics at Harvard Law School. “Otherwise you’re just creating a trap for the unwary.”

An Aug. 2 post on the blog Naked Capitalism called attention to Mr. Meng’s disclosures. In the following days, Calpers referred its internal findings to the state, according to a person familiar with the matter. A Calpers spokesman said that action wasn’t prompted by the blogger.

Several board members are questioning the way Calpers has handled the issue.

State controller Betty Yee called for a review of Calpers’s conflict-of-interest policies, “the CEO’s oversight and implementation of these policies, and any additional safeguards necessary to ensure this does not happen again.”

Another board member, Margaret Brown, said, “I’d like to know when did this come to the Calpers’ staff’s attention, who noticed it, what was done, what procedures and policies we have in place.”

Board Chairman Henry Jones said, “Our CEO advised me of this issue when she became aware of it. It had been scheduled to be brought to the Board upon completion of the investigation.” He previously said the issues over Mr. Meng’s investments are “private personnel matters and already have been addressed according to our internal compliance protocols.”

People close to Mr. Meng said that even before the internal review the investment chief was worn down by the public spotlight. Mr. Meng came to Calpers from a job as deputy chief investment officer of China’s State Administration of Foreign Exchange, the agency in charge of the country’s more than $3 trillion in foreign reserves. Before that he worked at Calpers from 2008 to 2015 and had stints at Morgan Stanley as well as Barclays Global Investors. Mr. Meng is from China and became a U.S. citizen.

As U.S.-China ties soured, Mr. Meng’s past role with China’s State Administration of Foreign Exchange prompted some Washington politicians to call attention to Calpers’s Chinese investments. To try to fend off the attacks, Calpers representatives spoke with various Washington lawmakers.

In February, Calpers representatives met with Rep. Jim Banks’s staff in Washington. The Indiana Republican had questioned Calpers’s holdings of Chinese companies and Mr. Meng’s ties to China. The Calpers representatives told Rep. Banks’s staff that they were concerned Mr. Meng would step down if the criticisms kept coming, people said. Mr. Banks’s staff said this wasn’t a personal attack but an effort to highlight a national security issue.

Mr. Meng confided to acquaintances that he was troubled by that mounting scrutiny, associates said. After the conflict-of-interest questions became public, Mr. Meng decided to resign rather than deal with another controversy, people familiar with the matter said.

“It’s important for me to focus on my health and on my family,” Mr. Meng said in a statement, “and move on to the next chapter in my life.”

On a call with investment staff this month, interim investment chief Dan Bienvenue said Calpers would continue with its investment plan. Calpers hopes to find a replacement who is also an experienced investor, said a person familiar with Calpers’s plans.

Write to Heather Gillers at heather.gillers@wsj.com and Dawn Lim at dawn.lim@wsj.com

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