Forensic Investigation of the
Jacksonville Police and Fire Pension
Fund
Report to Jacksonville City Council by Benchmark Financial Services,
Inc., October 28, 2015

  Key Findings:
1. The lack of transparency of the pension fund Board of Trustees
generally and in connection with this investigation amounts to a
profound “red flag.”
2. City Council may ask Florida Governor Scott to reconsider
investigating the pension due to statewide and national concerns
raised in this report.
3. Federal Bureau of Investigation and U.S. Securities and Exchange
Commission assistance may be advisable.
4. City Council should immediately subpoena information requested
over the course of this investigation that the Board has failed to
provide.
5. Board has failed to obtain insurance to protect pension from
Board errors and omissions, as well as fidelity bond coverage to
protect against fraud or dishonest acts by Board or staff. The
Board has used plan assets for its own legal defense, as opposed
to being used for the exclusive benefit of participants and
beneficiaries—in violation of Employee Retirement Income
Security Act (ERISA) fiduciary standards.
6. Board, staff and vendors may be subject to personal liability for
any ERISA fiduciary breaches since pension adopted heightened
ERISA fiduciary standards for Board, staff and all vendors.
7. Board has failed to provide oversight to ensure compliance with
heightened ERISA fiduciary standards. Many contracts between
Board, money managers and other vendors handling pension
assets, as well as their business practices, do not comply with
ERISA.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

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Police and Fire Pension Fund

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8. Board poor investment decision-making has resulted in at least
$370 million in underperformance losses.
9. Board failure to scrutinize investment management fees has
resulted in excess fees of $6 million annually or $36 million over
the past six years.
10.Board failed to provide information that was repeatedly
requested regarding an estimated $5.7 million in “commission
rebates” and related expenditures—information required to
identify whether there has been any potential embezzlement or
misuse of such pension assets.
11.Board’s recent $27 million loss in Energy Master Limited
Partnerships was imprudent due to lack of diversification, lack of
transparency, and high fees—an avoidable loss.
12.Board failed to heed credible warnings of conflicts of interest at
former investment consultant, eventually settling with firm for
$273,696 without analysis or evaluation of any harm caused to
the pension. Such conflicts (according to a U.S. Government
Accountability Office analysis) may have cost the pension almost
30 percent of its value—$300- $500 million over two decades.
13.Board failed to diligently monitor and record pension investment
performance which necessitates corrective action and accurate
reporting of true past pension performance to all stakeholders.
14.Board failed to scrutinize conflicts of interest related to, and
compensation disclosed, as well as received, by its General
Counsel and other law firms. City may seek assistance from the
Florida Bar and U.S. Department of Justice.
15.Board-approved senior staff pension plan was deemed illegal by
City General Counsel, and that plan may also fail to meet
heightened ERISA fiduciary standards.
16.Allegations of waste, abuse and ethics violations regarding Board
and staff travel should be resolved by limiting frequency, purpose
and range of travel.

 Executive Summary

The City of Jacksonville Police and Fire Pension Fund, with assets of
approximately $1.43 billion, has long been surrounded by controversy.
City leaders have debated reform of the Fund since at least 2008 when
Florida TaxWatch, a nonprofit government watchdog group, raised
alarms because the pension’s unfunded liability was about $798 million
at the time. According to Florida TaxWatch, today the unfunded liability
"stands at over $1.65 billion.”
The Fund’s funded ratio dropped from 87 percent in 2000 to 39 percent
in 2013—the lowest and most precipitous drop in funded ratio for any of
Florida’s large cities.
For years, residents have called for a forensic audit of the Fund to
determine whether the pension violated any state laws or rules, largely
due to a series of investigations by The Florida Times-Union which
“created an appearance of impropriety and raised issues of questionable
practices and leadership.” Florida Governor Rick Scott was asked to
authorize a state investigation of the Fund, as well as to specifically
investigate a special pension plan the Board of the Fund created for
senior staff members, including John Keane (the longtime executive
director)—a plan that the City’s General Counsel deemed illegal.

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I.

The Governor chose to stay out of the pension issues in Jacksonville,
noting that such “concerns would be more appropriately handled at the
local level.” Any specific criminal violations should be referred to local
law enforcement or the state attorney’s office, said Scott.
The Jacksonville City Council unanimously voted on April 28, 2015 to hire
Benchmark Financial Services, Inc. (“Benchmark”) to provide an expert
forensic review of the Fund. On June 24, 2015, Benchmark was
contractually engaged by the City Council.

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 Limitations on Investigation
We note with great emphasis that this investigation was conducted
without the power to compel the Board of Trustees of the Fund, staff or
others to comply with state disclosure laws or provide the information
we requested. As discussed with the Board Chair and noted throughout
the report, the Fund Administrator and other pension fiduciaries failed
to provide a great deal of the information we requested—including key
documents that we have been told do, in fact, exist.
For example, the Fund Administrator repeatedly represented to us—
contrary to written representations by the General Counsel of the Fund
to the Board—that no portfolio monitoring agreement ever existed
between the Fund and the Fund’s “primary securities litigation counsel,”
Bernstein Litowitz Berger & Grossmann.
The Fund Administrator repeatedly claimed to have no documents
disclosing the dollar amount of fees the General Counsel actually earned
in connection with specific class action litigations the General Counsel
recommended the Fund initiate against publicly traded companies—
despite the fact that the General Counsel himself stated in a letter to the
Board that the final percentage, amounts and names of firms receiving
such fees are always reported to the Board.
The historic investment performance information provided to us by the
Fund’s current investment consultant for the period from 1988 through
today was neither prepared, nor confirmed, by the master custodian
bank actually holding the assets—the most reliable source for such
information.
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Worse still, two decades of investment performance information was
prepared by a former pension consultant to the Fund who was
terminated as a result of an investigation by the United States Securities

 We are told the Board neither conducted nor commissioned any
meaningful review of the former consultant’s work—which included
advising on key issues such as asset allocation, money manager selection
and investment performance—or potential damages to the Fund
resulting from any fiduciary breaches, subsequent to terminating the
firm.
In response to our request for verified performance for the twenty-year
period, we were told that the master custodian had indicated it could
not at this time calculate performance for the period.
The performance information we were provided was clearly inaccurate,
at least in part. Upon questioning, the current investment consultant
acknowledged obvious inconsistencies in certain of the performance
figures.
Any analysis of investment performance data portions of which, at a
minimum, are clearly wrong is inherently less reliable.
While we have estimated Fund underperformance losses of
approximately $370 million, we simply do not know for certain how
well, or badly, the Fund’s investments have performed over the
decades—and, based upon the information we were provided,
apparently neither does the Board nor anyone else currently involved
with the Fund.
As mentioned above, certain significant information regarding potential
conflicts of interest and fees paid by the Fund (directly or indirectly in
connection with securities class action litigations), as well as fees paid by

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and Exchange Commission (“SEC”). The SEC investigation concluded the
firm breached its fiduciary duty to its pension clients by misrepresenting
and omitting to disclose material information.

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other fiduciaries of the Fund, such as law firms, investment managers
and consultants, to the Fund’s General Counsel was not provided
despite repeated requests.
Information we requested regarding the expenditure of an estimated
$5.7 million in securities trading commission dollars “rebated” to the
Fund was not provided.
We recommend that all information requests by Benchmark related to
this investigation, as well as all responses by the Board, Fund
Administrator and other plan fiduciaries, be made publicly available so
that stakeholders, including pension participants and taxpayers, are able
to evaluate for themselves the Fund’s level of transparency and the
integrity of its operations.
We understand that the City Council is subpoenaing the information
which we requested but did not receive. It may be advisable for the City
Council to ask the Governor to reconsider an investigation and, at the
very least read this report before dismissing the matter as a local issue.
In addition, Federal Bureau of Investigation and U.S. Securities and
Exchange Commission assistance may be advisable. The Florida Bar and
U.S> Department of Justice may also have an interest in certain matters
herein.
 Board Lack of Transparency Amounts to Profound “Red Flag”

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While the Fund’s website proclaims that the Board of the Fund supports
the Florida "Government in the Sunshine" laws designed to provide
transparency and openness in government operations, the Board has
repeatedly come under criticism from citizens, media, foundations and
City Council members for failing to be responsive to public records
requests. Further, the Board has reportedly spent hundreds of

 In connection with this investigation on behalf of the City Council,
although we submitted our first document request on June 29, 2015,
not a single record requested was provided to us by the Board or Fund
Administrator for almost two months.
It is important to note the following regarding our initial request for
documents:
1. Our request was not a “public records” request. It was a request
by the City Council for records related to a pension substantially
funded by the City.
2. Action by the City’s Ethic Director, as reported in The Florida
Times Union, immediately preceded and apparently prompted the
late response in August to our June records request.
3. As a result of the Times Union article, the Board was on notice of
the inadequate response to our requests and should have taken
action to ensure complete cooperation with this investigation.
4. The overwhelming majority of the documents requested, such as
annual reports and investment performance reports were
obviously readily available.
In the context of a forensic investigation into a highly controversial,
severely underfunded, underperforming public pension—a very public
investigation commissioned by the City Council—the delays, incomplete
and inconsistent responses, as well as failures to produce documents we
experienced amount to a profound “red flag,” in our opinion.

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thousands of Fund dollars in litigation related to requests for public
records.

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 Board Failure to Provide Fiduciary Oversight - Delegation of
Broad Responsibility to Administrator and Outside General
Counsel
A five-member Board of Pension Trustees has sole responsibility for
administering the Fund. The Board provides investment oversight for
the management of assets and has adopted a Statement of Investment
Policy for the Fund.
As detailed throughout this report, in our opinion, the Board has failed
to provide oversight, consistent with its fiduciary duties, with respect to
matters as fundamental as verifying, evaluating and reporting
investment performance of the Fund over time; investment manager
and other vendor compliance with applicable heightened ERISA fiduciary
standards adopted by the Fund; monitoring conflicts of interest and
establishing corresponding safeguards; and reviewing, as well as
assessing, the reasonableness of investment management and other
fees paid by the Fund.
The Board delegates responsibilities to the Fund Administrator for the
implementation of the Statement of Investment Policy and in the
provision of administrative oversight of the investment managers to
ensure that the Board’s policies are being properly implemented.
On the one hand, the Board has delegated exceptionally broad
responsibilities to the Fund Administrator, encompassing various
portfolio investment matters. On the other, the Fund Administrator
lacks any meaningful investment credentials.

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The Board has also delegated broad responsibility to an outside law firm
subject to numerous potential conflicts of interest related to matters
such as opining as to the legitimacy of a senior staff pension plan fullyfunded by the Fund and later deemed illegal by the City General
Counsel; splitting fees with class action law firms he recommended to

 the Board; receiving sponsorship fees for his annual client conference
from other plan fiduciaries; and advice regarding retaining and later
suing, as well as settling with, the former investment consultant.

In response to our inquiry, the Fund Administrator indicated that the
Board has no current errors and omissions or fidelity bond insurance
coverage. (It is our understanding that the Board of the City of
Jacksonville Retirement System also lacks such coverage.)
Currently, the cost of defending legal challenges to the Board’s actions,
e.g., denial of public records requests and allegedly illegal staff pensions,
is paid out of Fund assets (and ultimately by taxpayers and participants)
—as opposed to by an insurer. The Fund is also at risk regarding any loss
resulting from fraudulent or dishonest acts by the Board or the staff.
The Board has an obligation, as an ERISA fiduciary, to manage the Fund
exclusively for the benefit of participants. Opposing public records
requests or defending allegedly illegal staff pensions does not, in our
opinion, in any way benefit the Fund or its participants. Thus, in our
opinion, Fund assets should not be used to defend the Board, staff and
others in these matters.
As ERISA fiduciaries, the Board should obtain errors and omissions
coverage to protect the Fund against loss resulting from errors or
omissions by the Board or staff, in our opinion.

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 Board Lacks Errors and Omissions - Fidelity Bond Insurance

As ERISA fiduciaries, the Board should obtain fidelity bond coverage to
protect the Fund against loss resulting from fraudulent or dishonest acts
of the Board or staff, in our opinion.
A copy of this report, as well as any complaints filed against the Board or
staff should be provided to any potential insurer.

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Finally, as discussed below, as ERISA fiduciaries, the Board and staff may
be personally liable for any past or future breach of fiduciary duty,
including use of plan assets for personal benefit.
 ERISA Fiduciary Standard “Highest Known to the Law”
Adopted For Board, Staff and Service Providers
The Introduction to the Fund’s Statement of Investment Policy posted
on its website states, “Although the Board of Trustees acknowledges
that the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), does not apply to the Fund as a governmental retirement
plan, it hereby adopts the fiduciary provisions of ERISA. The Board, the
Fund's staff and the Fund's service providers shall discharge their
responsibilities in the same manner as if the Fund were governed by the
fiduciary responsibility provisions of ERISA.”
(The City of Jacksonville Retirement System includes the same language
in its Statement of Investment Policy posted on its website.)
The fiduciary duty established under ERISA is recognized as the “highest
known to the law.”
ERISA strictly prohibits a fiduciary from engaging in a self-dealing
transaction that involves plan assets where a conflict of interest exists.
The disclosure of a material conflict, alone, is never sufficient under
ERISA’s duty of loyalty and self-dealing “prohibited transaction”
provisions to avoid a violation of ERISA. Conflicts of interest are by
definition contrary to ERISA’s fiduciary duty of loyalty and self-dealing
prohibited transaction provisions.
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Failure to comply with ERISA’s fiduciary requirements can result in
significant penalties. ERISA provides that a fiduciary is personally liable

 in the event of a breach of the fiduciary duty provisions. Furthermore,
ERISA provides the fiduciary may have to make good on any losses to
the plan caused by the breach and restore any profits gained by the
fiduciary in using plan assets to its own benefit.

Since the Board has adopted the heightened fiduciary standards of
ERISA in the Fund’s Statement of Investment Policy posted on its
website, stakeholders (including participants and taxpayers) may
reasonably assume that the Board has established policies and
procedures to ensure compliance with these standards. We found scant
evidence of compliance with ERISA fiduciary standards.
In our opinion, it appears ERISA fiduciary compliance has been largely
overlooked—despite the fact that these are heightened fiduciary
standards, noncompliance can have serious consequences and there is a
risk of significant personal liability.
For example, as mentioned below, Board failure to scrutinize investment
management fees—as required under ERISA fiduciary standards—we
estimate, alone, has resulted in $6 million in excessive fees paid each
year or $36 million over the past six years. The Board’s failure to
conduct or commission any review of the damage to the Fund caused by
its former investment consultant over two decades, choosing instead to
accept a settlement of a mere $273,696, for an estimated $300-$500
million in underperformance losses, was exponentially costlier.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

 Lack of Compliance with ERISA Fiduciary Standards

Our limited review of the investment management agreements and
subscription agreements between the Board and its asset managers
identified serious apparent ERISA non-compliance.
For example, the Investor Subscription Booklet for the Acadian Emerging
Markets Equity II Fund LLC states that if the investor (the Fund) is not

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subject to ERISA, the Fund acknowledges that Acadian may enter into
certain transactions and represents that those transactions by Acadian
will not result in a violation of any law to which the Fund is subject that
is similar to the prohibited transaction provisions of ERISA and
represents that entering into such transactions is permissible under the
governing documents of the Fund.
The Fund Administrator indicated in the Acadian Investor Questionnaire
that the Fund was not subject to ERISA.
In short, it appears that Acadian may not be aware of its obligation to
manage Fund assets consistent with ERISA fiduciary standards and may
not be managing the Fund’s assets accordingly. While any such ERISA
fiduciary breaches could conceivably give rise to liability for losses, the
Fund has agreed to indemnify Acadian for any ERISA fiduciary breaches.
In the Eaton Vance Subscription Documents the Fund represented that it
was not subject to the fiduciary responsibility standards and prohibited
transaction restrictions of ERISA.
Certain of the practices permitted in the agreement with the Fund’s
Master Custodian, Northern Trust, appear to be inconsistent with ERISA
fiduciary standards. For example, the contract indicates that Northern
may deposit cash in any depository including its own banking
department, without any liability for the payment of interest thereon
and receive “float” income on uninvested cash.
The agreements between the Board and the Board’s General Counsel
and investment consultant raised additional ERISA fiduciary issues, in
our opinion.
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We recommend a complete review of the Fund’s policies, practices,
procedures and agreements for compliance with heightened ERISA
fiduciary standards. In the event that the Fund has suffered losses as a

 result of breaches of the ERISA fiduciary standard, damages may be
recoverable from responsible parties.

Pension staff consists of seven employees. The Executive DirectorAdministrator of the Fund since 1990 has been John Keane. Most
unusual, in addition to his role as Administrator of the Fund, Mr. Keane
has been the lead negotiator for police and fire unions in pension reform
negotiations.
Mr. Keane has been a controversial figure as a result of his frequent
convention travel, over $400,000 in unused vacation pay and
“questionable deals for his personally created pension.”
On August 29th, Mr. Keane gave three-week notice that he would retire
on September 18, 2015. However, at the Board’s insistence, he agreed
to stay on at the Fund through the end of the month. Most recently, it is
our understanding he has been engaged as a consultant to the Fund.
 General Counsel Potential Conflicts-Compensation Disclosure
The legal counsel to the Board over the decades has been the
Plantation, Florida law firm of Klausner Kaufman Jensen & Levinson. In
effect, the Klausner firm acts as the outside General Counsel of the
Board, supervising even other attorneys retained by the Board, as well
as recommending attorneys and specific litigations. In certain
documents Mr. Klausner refers to himself as General Counsel
As ERISA fiduciaries of the Fund, the Board has a duty to review any
potential conflicts of interest related to the General Counsel and other
law firms providing services to the Fund and all compensation paid to, or
received by, these parties related to the Fund for reasonableness.
Likewise, as ERSIA fiduciaries, the General Counsel and other law firms

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 Controversies Regarding Pension Staff

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providing services to the Fund have an obligation to disclose any
potential conflicts of interest and all compensation they pay, or receive,
related to the Fund.
As summarized below and detailed extensively in our report, based
upon the limited information eventually provided by the Fund
Administrator, it does not appear that the Board has fulfilled its fiduciary
duty under ERISA to scrutinize the conflicts related to, and
reasonableness of, the compensation paid to, or received by, the
General Counsel and other law firms related to the Fund.
In an effort to identify potential conflicts of interest and all sources of
compensation, we requested from the Fund Administrator documents
reflecting any compensation in any form, direct or indirect, paid by any
fiduciary of the Fund to the General Counsel or any related law firm or
entity for the past 15 years. If the Fund did not have these documents,
we requested that the General Counsel disclose this data to the Fund
pursuant to his fiduciary duties and provide us proof of this request and
response.
In response, the Fund Administrator provided only payee transaction
information indicating that the Fund (no other fiduciary) over the past
10 years (not the 15 requested) paid the General Counsel directly
approximately $2.72 million for professional services from October 2004
through August 19, 2015. The General Counsel provided no information
to us.
1. Compensation to General Counsel From Class Action Law Firms

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According to published reports (and the General Counsel himself), in
addition to the $2.7 million in fees paid by the Fund to the General
Counsel, his firm may have received millions in fees from one or more

 securities class action law firms retained by the Fund to pursue litigation
related to the Fund’s investments.

 Recommends class action law firms to monitor the Fund’s
investments and pursue litigation related to portfolio securities;
 Advises the Fund when to initiate or participate in a given lawsuit;
 Negotiates (on behalf of the Fund) fees paid to these law firms;
 Enters into fee-splitting arrangements with the firms he
recommends for class action litigations whereby his firm receives
a portion of the fees related to these cases.
Florida Rules of Professional Conduct applicable to lawyers effectively
provide that a division of fees between lawyers who are not in the
same firm may only be made pursuant to an agreement that fully
discloses that a division of fees will be made and the basis upon which
the division of fees will be made.
Any potential violations of such rules regarding full disclosure of fees,
including any misrepresentation of fee arrangements by a lawyer should
be reported to the appropriate authorities. An apparently isolated
violation may indicate a pattern of misconduct that only a disciplinary
investigation can uncover and reporting a violation is especially
important where the victim is unlikely to discover the offense, according
to the Florida Bar.
We note with great emphasis that even if any such fee-splitting
arrangements among law firms may be permissible under certain
conditions prescribed by laws generally applicable to Florida licensed
lawyers, whether the General Counsel, as an ERISA fiduciary to the Fund,
may receive such fees and whether the class action firms retained by the

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It is our understanding that the General Counsel:

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Fund, as ERISA fiduciaries, may pay such fees to the General Counsel in
connection with Fund litigation is an entirely separate matter. Any such
dealings may amount to “prohibited transactions” under ERISA fiduciary
standards and give rise to personal liability.

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In general, full disclosure of the potential conflict of interest and amount
of any compensation related to a transaction that could be considered
fiduciary “self-dealing” under ERISA would be required, at a minimum.
We repeatedly requested the Fund Administrator provide contracts
between the Fund and any class action securities law firms for either
monitoring or litigation. While the Fund Administrator eventually did
provide four portfolio monitoring agreements between the Fund and
securities litigation firms, he did not provide any contracts or
agreements between the Fund and the BLBG, the Fund’s primary
securities litigation counsel.
The Fund Administrator repeatedly stated—contrary to written
representations by the General Counsel to the Board we reviewed—that
no portfolio monitoring agreement ever existed between the Fund and
BLBG.
Shortly after a Forbes article that mentioned fees the General Counsel
received for referring cases to class action firms, the General Counsel
wrote a letter to the Trustees, at the request of the Chairman, to review
prior discussions concerning the Fund’s role as a lead plaintiff in
securities litigation matters.
The September 20, 2004 letter stated that the Board entered into an
agreement with BLBG to monitor the Fund’s portfolio and that in
addition to any contingency fee agreement the Fund might enter into
with BLBG, the General Counsel’s firm would be paid a fee from any
class settlement in which the Fund participated.

 Accordingly, we asked the Fund Administrator to provide the final
percentage and dollar amount of all fees received by the General
Counsel related to any class action litigation involving the Fund, as
disclosed to the Board. If the final percentages and dollar amounts were
not disclosed, we asked the Administrator so indicate. We received no
response from the Fund Administrator.
While our requests for information regarding compensation to the
General Counsel in connection with class action litigations were largely
unsuccessful, based upon limited information obtained from alternate
sources, we estimate that the General Counsel may have received the
following additional compensation:
United Health Group: Assuming the General Counsel received 10
percent of plaintiff’s counsel awarded fee of approximately $29 million
or $2.9 million, the fees he received from this case alone may exceed
total fees of $2.7 million paid directly by the Fund to the General
Counsel over the past ten years.
Merrill Lynch: Of the $8.5 million settlement, fees of $2.125 million were
awarded. The fees awarded represented 25 percent of the settlement—
not the 15-18 percent the General Counsel told the Board usually
applied. Assuming the General Counsel received 10 percent of the
approved fee, he earned $212,500—nearly as much as the $273,696 the

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If a fee was paid to any law firm, the amount and the names of the
payees would be reported in writing to the Board. No fee application or
settlement decision would be made without the Board’s prior approval.
Fees, said the General Counsel, “are usually between 15-18% of the
recovery. I usually receive between 5 and 10% of the approved fee. The
final percentage and the dollar amount are always reported to the
client.”

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Fund received from the Merrill settlement fund for harm caused to the
Fund.
In connection with an Ernst & Young (Nextcard) settlement, of a $23.2
million offer made in April 2005, the General Counsel stated he would
receive 10 percent of the fee ultimately paid to BLBG. Assuming BLBG
received a fee of 18 percent and the General Counsel received 10
percent of that fee, the General Counsel may have received $417,600.
We note in this report that other Florida public pension lawyers claim
that class action firms routinely offer them 18 percent. If true with
respect to the General Counsel, then the total class action fees
estimated above may be significantly understated.
It is our understanding that the City Council will subpoena from the
General Counsel information regarding all payments to and from his firm
and other law firms directly or indirectly related to the Fund. These
parties should not object since, according to the documents we have
reviewed, they supposedly have already provided all such fee-splitting
information to the Board.
We note that the Fund pays the General Counsel $285.00 per hour for
his legal services. As ERISA fiduciaries, the Board should examine any
differential in the hourly rate he receives in connection with class
actions, as well as any percentages in lieu of hourly rates.
2. Compensation From Fund Fiduciaries to General Counsel

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According to the same 2004 Forbes article, the General Counsel received
additional compensation from law firms (not related to legal services)
and other fiduciaries of the Fund, such as investment consultants and
investment advisors managing Fund assets.

 These payments between fiduciaries to the Fund pose a significant
potential conflict of interest. For example, in addition to recommending
BLBG to the Fund as primary counsel for highly-lucrative securities
litigation, the General Counsel advised the Fund on conflicts of interest
involving the former investment gatekeeper (Merrill Lynch), as well as
the decision to terminate Merrill and later participated in litigation
(resulting in fees paid to BLBG and his own firm) against Merrill.
We also note that Victor Zollo, President of the Fund’s longest domestic
equity investment manager, DePrince, Race & Zollo (which currently
manages approximately $110 million for the Fund and has managed
Fund assets since September 1994) was a speaker at the Klausner 2015
public pension client conference and the manager may have paid to
sponsor the conference.
Based upon interviews with past sponsors of the conference, it is our
understanding that the cost of sponsorship of the General Counsel’s
public pension client conference remains at $30,000.
From late June through September 2015, we repeatedly requested
information from the Fund Administrator regarding any such payments
by Fund fiduciaries to the General Counsel. The Fund Administrator’s
final response was “Unknown.” When asked whether he would ask the
General Counsel for such information—information the Fund
Administrator stated he did not know—he did not respond to us.
It is our understanding that the City Council will subpoena from the
General Counsel records of any compensation received from Fund
fiduciaries.

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According to published reports, both BLBG and Merrill Lynch, the Fund’s
terminated investment consultant, paid to sponsor the General
Counsel’s annual public pension client conference.

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 Allegedly Illegal Senior Staff Pension Plan

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On July 30, 2012, the Times Union published an article stating that
“since the late 1990s, Fund Executive Director John Keane has been
signed up for a pension created for him by the fund with little outside
notice.” Both former City Council auditor Bob Johnson and current
council auditor Kirk Sherman are quoted in the article as saying they
were unaware of the existence of the pension program, which only
covered a handful of fund employees, until that month.
According to the article, the existence of this “Senior Staff Voluntary
Retirement Plan” was officially “recognized for the first time” in a
recently released actuarial study of the Fund. The plan reportedly had
$2.3 million in assets at that time, with the money invested along with
the Fund’s assets. The Plan could pay as much as $200,000 a year when
Keane retired, according to the Times Union.
Shortly thereafter, the City’s General Counsel issued an opinion that the
Fund was not authorized under the City Charter to create the “Senior
Pension Plan” and demanded the money spent to fund the pensions be
repaid. The Fund’s General Counsel countered that its opinion as to the
legality of the plan, as originally expressed in 1999 (in connection with
establishment of the plan), remained unchanged.
In 2012, the City Council voted unanimously to file a lawsuit regarding
the plan but, for whatever reasons, never did. While the City General
Counsel had gone so far as to tell the Fund to stop putting money into
the account, a large cash infusion of more than $250,000 reportedly
went into the account subsequently and effectively placed the account
at over-funded status. On September 21, 2015, the Jacksonville City

 It appears that neither the City General Counsel nor the Fund General
Counsel reviewed whether, in connection with the staff pension, the
Board discharged its responsibilities consistent with the heightened
fiduciary standards of ERISA.
We recommend that the City Council in connection with any potential
litigation regarding the separate senior pension examine separately
whether the Board, consistent with its ERISA fiduciary duties, followed a
prudent process in deciding to take assets from the underfunded
pension to establish, maintain and fully-fund the generous senior staff
plan.
 Allegations of Waste, Abuse and Ethics Violations Regarding
Board and Staff Travel
Public pension trustee and staff travel to attend lavish conferences
globally, underwritten primarily by Wall Street (and, increasingly,
plaintiff class action securities law firms) seeking to garner asset
management and legal contingency fees from these funds has for
decades been highly controversial nationally.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Council voted 18-1 to take legal action regarding the specially created
pension.

So controversial are these conferences that the website for the 2013
National Conference on Public Employee Retirement Systems held on
the famed beaches of Waikiki, supplied board members hoping to shore
up support for their expenses-paid trip a “2013 Attendance Justification
Tool Kit.”
Both the Fund Administrator and General Counsel are regular
participants at public pension conferences and have long defended
them. The General Counsel’s firm has served as general counsel for
more than 15 years to the above-mentioned National Conference of

21

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Public Employee Retirement Systems and actually puts on its own
annual public pension trustee and staff conference.

22

There is broad consensus that the educational content of many public
pension conferences is suspect. Even the Fund’s General Counsel has
acknowledged the abuses, as the Fund Administrator has claimed the
Board monitors conference attendance for value.
According to a memorandum to the Jacksonville Ethics Commission from
Carla Miller dated November 3, 2014, during 2013 and 2014, the Ethics
Office investigated complaints concerning allegations of waste, abuse
and ethics violations pertaining to the travel of the Fund Administrator
and Bobby Deal (Chair of the Board).
Miller concluded, “There is a lack of analysis and/or oversight of the
many trips taken as to their value to the PFPF Fund.” The Ethics Director
recommendations to the Ethics Commission included additional review
of Keane and Deal travel by the Council Auditor.
In our opinion, the likelihood that public pension board members and
staff who lack investment experience will learn anything meaningful
regarding pension investing through travel to exotic locations is remote.
Further, the risks related to such high-stakes marketing junkets are
substantial and, in our opinion, far outweigh any educational benefit.
The potential for corruption of the investment decision-making process
at pensions, resulting in higher fees and lower performance, is obvious
and enormous.
Most recently, the Fund Administrator’s travel, including 31 trips since
2010—to destinations including Scotland and Canada and staying at
hotels such as Caesars Palace, Hotel Frontenac, Four Seasons, and
Trump Tower—has emerged as an issue in connection with the

 In summary, given that: (1) public pension trustee and staff travel to
lavish conferences globally has generated controversy for decades
across the nation; (2) the Board and Keane’s travel has been intensely
criticized locally (including an Ethics, Compliance and Oversight Office
Review); and (3) the severely underfunded status of the pension, it is
recommended that the Board and staff eliminate such non-essential
travel.
Most important, extensive travel by the Board and staff is inconsistent
with the fiduciary obligation under ERISA to manage plan assets for the
exclusive benefit of the participants, in our opinion.
 Board Lack of Scrutiny of Investment Management Fees- $6
Million in Excess Fees Paid Annually
It is well established that sponsors of public and private retirement plans
have a fiduciary duty to ensure that the fees plans pay money managers
for investment advisory services are reasonable. Fees paid for
retirement plan investment services have always been an important
consideration for ERISA retirement plan fiduciaries. Further, in recent
years such fees have come under increased scrutiny because of class
action litigation, Department of Labor regulations, and Congressional
hearings.
We requested from the Fund Administrator any analyses that may have
been prepared for the Board to scrutinize whether the fees the Fund
pays its asset managers are reasonable. Remarkably, according to the
Fund’s investment consultant, Summit Group, no fee analyses have
been prepared for the Board by Summit or any third party for this $1.43
billion pension.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

estimated almost $475,000 he has already and is expected to collect for
unused vacation days in the past five fiscal years.

23

 “The net fees paid are buried in the investment performance reports,”
we were told.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

However, according to Summit, the Fund Administrator had instructed
the firm to prepare the first such report for our review.
In our opinion, without a comprehensive fee analysis prepared by the
investment consultant or a third party, the Board cannot fulfill its
fiduciary duty to monitor the reasonableness of fees the Fund pays its
investment managers.

24

For managers that utilize performance-based fees, the prospective fee
in the Summit analysis included only the base fee and not any
performance component. Further, we note that with respect to real

We also noted the Fund has no most favored nation (“mfn”) provision in
any of its contracts with investment managers and does not require
managers to certify quarterly or annually that the Fund is receiving the
lowest fee they offer. However, the current investment consultant to
the Fund agrees that mfn provisions are commonplace, particularly with
respect to public pensions and helpful in reducing fees.
Even based upon the Summit analysis prepared for us (which, as
explained in the report, we believe is deeply flawed) the fees paid to
virtually all the U.S. Equity investment managers are 50 percent higher
than they should be, in our opinion.
We recommend that all of the investment advisory fees the Fund pays
its managers be fully disclosed to the Board and compared against the
fees public pensions actually pay (as opposed to “published” fees), as
well as, if need be, vigorously renegotiated. The emphasis on active
management should be reexamined since (as noted below) long term
underperformance of the active managers net of fees has been costly to
the Fund.

 In our opinion, investment costs could easily be dramatically reduced,
saving the Fund perhaps $6 million annually or $36 million over the past
six years, and, more importantly, improving performance. Further, we
do not believe that the prospective fees for Year-End 6/30/15 amount to
only 48 basis points or almost $8 million, as indicated in the Summit
analysis. Rather, we estimate total investment management fees alone
are $10 million or more annually.
 Suspect Data Suggests $370 Million Underperformance Losses
According to the Fund Administrator, Northern Trust (which has been
the Master Custodian for the Fund for over a decade) cannot provide
investment return information on a gross and net basis because the
bank was not engaged to report on the Fund’s performance in the past
and cannot create a performance history at this time.
While the custodian can and does routinely provide performance
information to pensions, the Board chose to have the former investment
consultant, Merrill Lynch and now Summit, provide it. This is highly
problematic because:
1. The custodian, as holder of the Fund’s assets, is always in the
best position to verify values and performances of the
respective investment managers;
2. The consultant and the managers are subject to a conflict of
interest in calculating performance; and
3. Here, as discussed extensively below, the integrity of the
former consultant to the Fund—the party calculating
performance over a two decade period—was challenged by
regulators.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

estate and Energy Master Limited Partnerships, we do not believe all
applicable fees have been included in the Summit analysis.

25

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

As a result, according to the Fund Administrator, the only performance
reports that exist at this time for the 20-year period when Merrill Lynch
was the investment consultant were prepared by Merrill—information
which has not been verified by the custodian holding the assets.

26

Further, the current investment consultant, once retained, undertook
no analysis of Merrill’s performance reports. Summit was never asked
by the Board to verify the Merrill performance figures. Rather, Summit
simply “downloaded a giant spreadsheet in 2007 from Merrill and
uploaded it into the Fund’s performance history.”
The Merrill gross and net annual performances reported from 1988
through 2001 were identical—no difference was indicated between the
performance before and after fees. Since we know that the Fund paid
investment management fees during this 13-year period, either the
gross or net figures (or possibly both) must be wrong. Further, from
2002 through today, the difference between gross and net performance
has inexplicably ranged from as low as 5 basis points to 55 basis points.
In conclusion, the performance of the Fund since 1988 is inaccurate, at
least in part—a fact which the Board should have easily detected.
According to the current consultant, on a net basis—even based upon
suspect long-term performance data provided by the former
consultant—the Fund’s US Equity, International Equity, and Fixed
Income actively managed assets—approximately 83 percent of total
assets—have underperformed their respective indices for virtually all 1,
3, 5 and 10-year periods. If the long-term performance is inflated (gross)
then the actual (net) investment performance may be worse.
As discussed more fully in the report, we compared the adjusted net
investment performance of the Fund that we were provided from 1988
through 2014 against a 75 percent S&P 500 and 25 percent Barclays
Aggregate index and concluded that the performance of the Fund would

 have improved by approximately $370 million had the assets been
invested in low-cost, highly-liquid, fully-transparent index funds.

We note with great emphasis that due to the Board’s failure to diligently
scrutinize Fund performance, the performance history is so uncertain
that any analysis is inherently speculative. We understand the City
Council may subpoena from the Fund’s Master Custodian the relevant
records since 1988, as well as verify and report to stakeholders the true
net performance.
 $27 Million Loss Gambling on Energy Master Limited
Partnerships
Three years ago, the Fund invested approximately $106 million or 6.75
percent of its assets with two investment managers who are paid to
invest fund assets exclusively in Energy Master Limited Partnerships
(MLPs). In addition to lacking diversification, these investments are
subject to regulatory, interest rate, and liability risk. MLPs involve
significant fees at the partnership level (2 percent or more)—in addition
to the fees (75 basis points) the Fund pays the investment managers.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

In other words, a significant factor contributing to the underfunding of
the pension appears to have been poor investment decision-making by
the Board.

In the past year, the Fund’s MLP investments have lost 33 percent in
value and over a three-year period, they have significantly
underperformed (3.5 vs. 12.5 percent) the public equity market.
Note that 9 percent underperformance over 3 years amounts to $27
million in underperformance losses without compounding.
According to the Wall Street Journal, as the price of oil has fallen, these
investments have continued to plummet in value. The Alerian MLP

27

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

index fell 15.3 percent last month—the third-worst monthly loss in its
nearly 20-year history. The average MLP mutual fund, according to
Morningstar, lost 15.8 percent for the month.

28

In our opinion, gambling on opaque, high-cost, high-risk MLP
investments is imprudent, especially for a severely underfunded
pension—regardless of the multi-million loss outcome.
 Need to Account for $5.7 Million in Commission Rebates
"Commission recapture" is a process whereby a pension plan receives a
rebate in connection with brokerage transactions incurred through the
pension’s investment managers. This rebate represents a portion of
commission (equity trade) or spread (fixed income trade) charged on
these investment transactions.
Commission recapture arrangements are indirect payment schemes that
may compromise transparency and accountability, as well as present
conflicts of interest for all fiduciaries involved.
Boards or staff who use recaptured funds for purposes other than the
best interest of the plan and beneficiaries may violate their fiduciary
duties and applicable law.
Even the largest public pension in Florida was scarred by a commission
rebate scheme in 1999, when a member of the staff of the Florida State
Board of Administration was discovered to have embezzled more than
$400,000 in brokerage rebates.
According to a 1994 article, the Fund started its commission recapture
program in 1987, when the Board instructed its money managers to
place all buy and sell orders through a New York-based brokerage firm.
From 1987 to 1994, the Fund Administrator publicly claimed that the
Fund had saved more than $600,000 in commission costs. He also

 indicated that commission recapture funds had been used to purchase
the Fund’s office building.

We requested annual statements of commissions recaptured by the
pension since 1987, as well as documents related to the expenditure of
the recaptured amounts.
Instead we were provided with statements indicating commissions
recaptured since 2005 (not since 1987, as requested) in the amount of
$1.936 million. Assuming the Fund has recaptured approximately
$200,000 per year since 1987, approximately $5.7 million in
commissions may have been rebated.
In response to our question regarding how the commission rebates had
been spent, we were simply told, “The funds were deposited into our
General Account.”
As noted above, the Fund Administrator himself has mentioned in
speeches that recaptured commissions were used to buy a building for
the Fund’s offices.
In our opinion, stakeholders should be provided with a full accounting of
all rebated dollars in order to determine whether they have—consistent
with heightened ERISA fiduciary standards—been used for the exclusive
benefit of the participants. In the event any such funds have been
misused, the funds should be recovered.
Note that actively managed accounts with higher portfolio turnover
generate greater commission rebates. The Board’s emphasis on
recapturing commissions may have led to excessive reliance upon active
management, contributing to the Fund’s overall underperformance.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The article goes on to quote the Fund Administrator saying that the
Fund's policy is” ABC-all brokerage recaptured.”

29

 We understand that the City Council may subpoena records related to
the receipt and use of rebated commission dollars since 1987.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

 High Cost of Decades of Conflicted Gatekeeper Advice

30

The Board utilizes the services of an investment consultant who advises
the Board on investment policies and decisions, and who assists in
implementing those decisions. The Board does not utilize an investment
committee consisting of knowledgeable investment and financial
professionals that could be helpful to assuring sound financial and
investment decisions by the Board.
In early 1996, questions surrounding conflicts of interest related to
pension consultants began to attract national attention.
By 2000, the dangers related to Florida-based pension consultants with
affiliated securities brokerages were being discussed with local public
pensions and their attorneys.
In 2002, Edward Siedle, President of Benchmark, was invited to give a
speech specifically focused upon pension consultant conflicts at the
annual Florida Police and Firefighters Pension Trustee Educational
Seminar. The breach of fiduciary duty that results when an advisor,
retained to provide objective advice to pensions regarding allocation of
assets and selection of money managers to invest such assets, receives
brokerage compensation from the very money managers he
recommends to his pension clients was explained. Details regarding the
first-ever investigation of broker-consultant conflicts for a public
pension in Nashville that resulted in a $10 million recovery for the single
public pension was provided. Attendees were warned of the potential
damages to Florida police and firefighter pension plans.
Around this time, Siedle met with and discussed conflicts of interest
involving Merrill Lynch—the Fund’s then investment consultant—

 In late 2003, the staff of the SEC announced an inquiry into conflicts of
interest involving investment consultants to pensions. Benchmark
worked closely with the SEC on this inquiry. Securities regulators from
the State of Florida came to our offices to review files regarding the
consultant abuses we had uncovered.
On May 16, 2005 the staff of the SEC’s Office of Compliance Inspections
and Examinations issued a report which, in part, concluded that conflicts
of interest were pervasive and disclosure practices lacking in the
investment consulting industry.
Weeks later, the SEC and Department of Labor issued a publication
entitled “Guidance Addressing Potential Conflicts of Interest Involving
Pension Consultants.”
Most significantly, conflicts of interest at investment consulting firms
were found to result in substantial financial harm to plans by the U.S.
Government Accountability Office (“GAO”) in a 2007 report, i.e., plans
using consultants with undisclosed conflicts of interest had annual
returns generally 1.3 percent lower.
For almost twenty years, from 1988 through December 31, 2007, Merrill
Lynch, a broker-affiliated investment consultant, served as the
investment consultant to the Board. If, as the GAO study found, pension
consultant conflicts cost plans 1.3 percent, then over a 20-year period,
with compounding, such conflicts may have cost the Fund almost 30
percent of its value—perhaps $300-$500 million.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

specifically with the Fund Administrator, Fund General Counsel and
attorneys from BLBG accompanying the Fund Administrator. In light of
the potential harm to the Fund and other Florida public pensions, Siedle
urged them to take immediate action.

31

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Apparently throughout the consulting relationship Merrill Lynch’s
trading desk received trading commissions from investment managers
that Merrill Lynch Consulting Services recommended to the Fund, in
addition to a “hard dollar” annual fee from the Fund.
The General Counsel of the Fund publicly stated that the trades by the
Fund’s managers with Merrill’s brokerage arm were “separate, so
conflicts are less inherent” and “even if trades are made through Merrill
Lynch's brokerage arm, those fees never make their way back to the
consulting arm.”
In 2003, when, according to The New York Times, Merrill Lynch paid to
sponsor the General Counsel’s annual client conference, Board
members and Fund General Counsel were, according to documents we
were provided in connection with this review, questioning Merrill
regarding conflicts and business practices.
In December 2004, The New York Times wrote an article, How
Consultants Can Retire on Your Pension, which discussed that potential
consultant conflicts were greatest at firms with brokerage or trading
operations. It was also stated that Merrill Lynch Consulting Services in
Jacksonville had almost 100 pension funds in Florida as its clients but
that some Florida funds had already fired the firm and replaced it with
an independent consultant.
In December 2005, The New York Times ran an article entitled, “Merrill
Unit Subpoenaed on Pensions.” It was now widely known that the SEC
was investigating Merrill’s pension consulting operation in Florida.

32

In early 2006, the SEC contacted the Fund requesting voluntary
cooperation in an investigation of Merrill. The Wall Street Journal
reported on March 12, 2007 that Merrill had begun issuing refunds to
public pension clients in Florida. On Sunday, November 4, 2007, the New

 By late 2007, when an SEC enforcement action against Merrill appeared
imminent, Fund General Counsel recommended terminating the
agreement with Merrill effective December 31, 2007, as well as tasking
the new consultant with an in depth review of Merrill’s reports and
practices to determine if any previously undisclosed concerns were
present and authorizing discussion with the Fund’s securities counsel to
determine if the Fund had suffered a recoverable loss.
On May 2008, Merrill announced it was closing down its Florida pension
advisory practice and in January, 2009, the SEC took action against
Merrill. Merrill Lynch agreed to settle the SEC’s charges and pay a $1
million penalty.
On July 15, 2010, 76 Florida local public pensions, including the Fund,
filed a detailed putative class action complaint against Merrill Lynch.
On March 23, 2012, the parties entered into a settlement resolving the
matter for $8.5 million. Attorneys for the plaintiffs, including BLBG and
the General Counsel’s firm, shared $2.125 million in legal fees.
In response to our request for information, we were provided with a
check dated February 28, 2013 made out to the Fund in the amount of
$273,696.64 and a letter indicating that the check represented the
Fund’s pro rata share of the net settlement fund from the class action
case brought against Merrill Lynch. It appears that, aside from an earlier
transaction management credit of $10,000, this is the total
compensation the Fund received from Merrill Lynch.
Since, based upon the GAO study, pension consultant conflicts may have
cost the Fund almost 30 percent we requested any evaluation or review
of the damage caused to the Fund by Merrill over the decades.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

York Times ran an article regarding the SEC investigation of Merrill and
the letters the firm had sent to clients.

33

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The Fund Administrator provided no such analysis and, as indicated
above, the new consultant indicated it undertook no such review.

34

In our opinion, the Board failed to heed credible warnings and
adequately investigate conflicts of interest related to the Fund’s
consultant for years. Based upon the documents we were provided, it
appears the Board did not question the receipt of compensation by the
General Counsel’s firm—an obvious potential conflict of interest noted
in The New York Times—from the consultant during the period. Even
after terminating Merrill, the Board failed to conduct or commission any
review of the potential harm to the Fund caused by Merrill, choosing
instead to accept a settlement of a mere $273,696, for an estimated
(based upon GAO analysis) $300-$500 million in underperformance
losses. The Board failed to investigate the fact that the gross and net
investment performance of the Fund as reported by Merrill were
inexplicably the same for many years.
 Current Consultant- Summit Strategies Group
At least since the termination of Merrill Lynch, the investment
consultant to the Board has been Summit Strategies Group.
While the list of the consultant’s duties in the contract between the
consultant and the Fund and the Statement of Investment Policy is
extensive, conspicuously absent is any specific obligation to advise and
assist the Board in negotiating and evaluating the investment advisory
fees the Fund pays.
The Board’s contract with Summit provides that information needed to
provide the investment evaluations required of the Fund and its
investment managers are generally contained in the records and reports
of the custodian bank and that the consultant is entitled to reasonably
rely upon such information.

 We recommend the contract between the Fund and its Master
Custodian be amended to include calculating investment performance
and that the Fund rely upon any investment consultant for only advice
and analysis of such verified investment performance. We also
recommend that the contract between the Fund and any investment
consultant be amended to include a duty to advise the Board on the
reasonableness of the investment advisory fees the Fund pays.


Plaintiff Class Action Monitoring Agreements

The Fund has entered into agreements with multiple securities class
action law firms to monitor its investment portfolio in order to
determine whether the Fund has suffered any loss due to violations of
federal and/or state securities laws, calculate losses, identify breaches
of fiduciary duty and other corporate misconduct.
Some have severely criticized these “portfolio monitoring”
arrangements between pensions and class action firms. One highly
regarded federal judge, Judge Rakoff, noted in 2009, that such an
arrangement was “about as obvious an instance of conflict of interest as
I’ve ever encountered in my life.” He said he was shocked that persons
with a fiduciary duty to monitor pension investments would choose “to
save a few bucks” by hiring a law firm to monitor those investments that
could only profit by recommending litigation.
In response to plaintiffs’ counsel’s suggestion that his law firm analyzed
and evaluated the merits of the case before recommending that the
fund become involved in litigation, Judge Rakoff said that arrangement
"makes crystal clear that the Iron Workers (the pension involved) are

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

While the custodian bank could provide such performance information,
the Board under Merrill Lynch and now under Summit, continues to rely
upon the consultant for performance analyses.

35

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

being led by counsel rather than the other way around (emphasis
added)."

36

We were provided with and reviewed portfolio monitoring agreements
between the Fund and Bernstein Liebhard; Cohen Milstein; Berman
DeValerio; and Spector Roseman. Again, we note that no portfolio
monitoring or any other agreement between the Fund and the law firm
of BLBG has been provided to us, despite our repeated requests.
The relationship between BLBG, the Fund and the Fund Administrator
has been longstanding and is widely known.
The agreements Bernstein Liebhard and Berman DeValerio are relatively
new (2011 and 2012, respectively) and seem quite broad, indicating that
these firms will proactively identify instances of abuse by corporate
management and breaches of fiduciary duties under federal securities,
state securities, corporate and related areas of law. Whether class
action securities firms, in general, are truly capable of ferreting out all
such abuses is uncertain.
For example, based upon information provided by the Fund
Administrator, it appears that no law firm monitoring the Fund’s
investments over the period from 1988 through 2008 notified the Fund
of fiduciary breaches related to Merrill Lynch Consulting Services early
on—breaches for which the SEC later took action against the firm.
Whether any firm monitoring the Fund’s investments during this period
represented that it would notify the Fund of any such fiduciary breaches
should, in our opinion, be reviewed—if for no other reason than to
determine whether the Fund should continue to rely upon any such firm
to identify key fiduciary breaches related to its investments in the
future.

 Placement agents are intermediaries or middlemen paid by external
investment managers to market and sell their investment products.
Placement agent fees are paid directly by money managers and
indirectly by investors through higher asset-based fees than would be
available absent the compensation arrangement between the manager
and the intermediary.
The investment advisory contracts between the Board and the Fund’s
investment managers we were provided in response to our request
generally include a provision stating that the manager warrants that it
has not employed or retained a placement agent.
In response to our specific question the Fund Administrator represented
that that no placement agent has ever directly or indirectly received
compensation related to the Fund.
We note however, the following:
1. We were only provided with the most recent contracts to review.
Whether older contracts contained such provisions is unknown.
2. Certain of the Fund’s investments were made pursuant to
subscription agreements and, as a result, there apparently were
no representations regarding placement agents with respect to
these investments.
3. Illiquid investments, such as those mentioned in item 2 above,
commonly involve the use of placement agents.
4. Since placement agent fees are paid by the investment manager,
the Fund Administrator may not be aware of any fee that may
have been paid.
5. Whether compliance with the placement agent prohibition has
been monitored or enforced over the years is unclear.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

 Placement Agent Contingent Fees

37

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund



38

Conclusion

As summarized above and detailed in our report, in our opinion, the
Board has failed to provide oversight, consistent with its fiduciary duties,
with respect to matters as fundamental as recording, evaluating and
reporting investment performance of the Fund over time; investment
manager and other vendor compliance with state and federal
heightened ERISA fiduciary standards adopted by the Fund; monitoring
conflicts of interest and establishing corresponding safeguards; and
reviewing, as well as assessing, the reasonableness of investment
management and other fees paid by the Fund.
While the Board, staff and others related to the Fund will, no doubt,
dispute some or all of these findings, we believe that providing all the
relevant information related to the issues identified in this report to the
public, regulators and law enforcement, can only benefit all
stakeholders in the Fund, as well as the nation.

END EXECUTIVE SUMMARY

 II.

Introduction

The Fund covers all full-time civil service members of the City Police and
Fire Departments. Qualified membership is limited to only police officers
and firefighters who are not members of any other pension fund. There
were 5,038 total participants in the Fund as of September 30, 2014. The
purpose of the Fund is to provide long-term benefits to the Fund’s
participants and their beneficiaries.
City leaders have debated reform of the Fund since at least 2008 when
Florida TaxWatch, a nonprofit government watchdog group, raised
alarms because the pension’s unfunded liability was about $798 million
at the time.1 According to Florida TaxWatch, today the unfunded liability
"stands at over $1.65 billion. It’s increased three-fold since we called for
reform in 2008."2
A Jacksonville Community Council study investigating Jacksonville’s
financial condition in 2009 concluded that the reasons for the massively
underfunded pension included (i) lower investment returns than were
assumed by the Fund, (ii) investment decisions and policies, (iii) changes
in actuarial assumptions that asymmetrically locked in market gains but
smoothed market losses, (iv) increased benefits (notably adding cost of
living adjustments, or “COLAs” which employed a compounded 3
percent annual rate to benefit payments) and (v) changes in payroll.3
1

http://jacksonville.com/files/interactives/pensions/#part1

2

http://news.wjct.org/post/jacksonville-rep-leads-workshop-examine-pension-problem

3

“Our Money, Our City: Financing Jacksonville’s Future,” pg. 26.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The City of Jacksonville, Florida Police and Fire Pension Fund (“the
Fund”) is a single-employer contributory defined benefit pension plan
with assets of approximately $1.43 billion at September 30, 2015.

39

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

On August 21, 2013, Mayor Alvin Brown appointed seventeen persons
to the Jacksonville Retirement Reform Task Force, whose mission was to
examine the Fund and make recommendations concerning its future
and the design of and funding for pension benefits for Jacksonville police
and firefighters. The Task Force was an enlarged and reconstituted task
force from that which had been appointed by the Mayor on July 3,
2013.4
The Task Force completed its work on March 19, 2014, and on that date
unanimously adopted its Report for delivery to the Mayor, the City
Council President and the Administrator of the Fund.
As noted in the opening of the Report, in FY 2000, the Fund’s deficit was
approximately $124 million. In FY 2008, it increased to $798 million and
in FY 2012 to $1.7 billion. At the same time, the Fund’s funded ratio
dropped from 87 percent in FY 2000 to 39 percent in FY 2013.
“These numbers are truly astounding. In FY 2000, the Fund was 87% funded; in FY
2008, 53% funded; and in FY 2012, 39% funded. That is the lowest and most
precipitous drop in funded ratio for any of Florida’s large cities, despite the fact that
every city in Florida – and for that matter in the country – experienced the same
turbulent market conditions over that period of time.”

The Task Force Report contained numerous findings and conclusions
and made recommendations with detailed explanations. With respect to
investments, the Task Force called for the creation of a financial and
investment advisory committee charged with advisory oversight to the
Board of the Fund. Ethics, Certification and Disclosure Requirements

40
4

http://www.coj.net/retirement-reform/docs/retirement-reform-task-force-final-executivesumma.aspx

 On December 15, 2014, state Representative Janet Adkins sent a letter
to Florida Governor Rick Scott requesting the governor assign his
inspector general and the Florida Department of Law Enforcement to
look into the Fund’s operations to determine if any state laws or
regulations had been broken.6
Citing The Florida Times-Union articles about Jacksonville’s pension
issues, Adkins said they “create an appearance of impropriety, raise
issues of questionable practices and possible mismanagement of the fire
and police pension fund” that warranted a state investigation. Adkins
specifically asked for an investigation of a special pension plan the Police
and Fire Pension Fund board created for senior staff members, including
John Keane, the longtime executive director.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

were recommended for Investment Managers and Advisors.5 It was
recommended that the Fund ordinarily use the Office of General
Counsel of the City for its legal needs. Persons appointed to serve as
Trustees of the Fund by the Mayor and City Council should be persons
with professional financial or public pension experience. Also, greater
disclosure on a timely basis on the fund’s website was recommended.
Finally, there were recommendations on the selection and
compensation of a future Fund Administrator/Chief Investment Officer.

5

It does not appear that any such requirements were recommended for other vendors, such as
lawyers, investment consultants and custodians.
6

http://jacksonville.com/news/metro/2014-12-16/story/state-rep-adkins-calls-gov-rick-scott-stateinvestigation-jacksonville

41

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The Atlantic Beach City Commission and various members of the
Jacksonville City Council sent letters of support backing Adkins’ letter to
the governor.

42

In early February 2015, Scott’s office sent Adkins a letter signed by his
chief inspector general, Melinda Miguel, who wrote that her office was
choosing to stay out of the pension issues in Jacksonville.
“Based on our review, it appears that your concerns would be more appropriately
handled at the local level,” Miguel wrote. “If you are aware of specific criminal
violations, you may refer this information to local law enforcement or the state
attorney’s office.”7

The Jacksonville City Council unanimously voted on April 28, 2015 to hire
Benchmark Financial Services, Inc. (“Benchmark”) to provide an expert
forensic review of the Fund. On June 24, 2015, Benchmark was
contractually engaged by the City Council.
This investigation has focused upon transparency, governance and
oversight of the Fund; state and federal fiduciary standards applicable to
the Board, staff, investment managers, consultants, lawyers and other
vendors, as well as compliance therewith; potential conflicts of interest
and fiduciary breaches; disclosed and undisclosed fees paid by the Fund
(or in connection with its assets) to investment managers and other
fiduciaries; verifying, evaluating and reporting of investment
performance; accounting, disclosure and use of commissions rebated to
the Fund; fee-splitting by class action securities firms monitoring the
Fund’s portfolio investments and potential use of placement agent
intermediaries in connection with the pension’s investments.

7

http://jacksonville.com/news/florida/2015-02-03/story/scott-rejects-adkins-request-pensioninvestigation-says-issue-local

 Limitations On Investigation

We note with great emphasis that this investigation was conducted
without the power to compel the Board of Trustees of the Fund to
comply with state disclosure laws or provide the documents we
requested. As discussed with the Board Chair and noted throughout the
report, the Fund Administrator and others failed to provide a great deal
of the information we requested—including key documents which we
have been told do, in fact, exist.
For example, the Fund Administrator repeatedly represented to us—
contrary to written representations by the General Counsel of the Fund
to the Board—that no portfolio monitoring agreement ever existed
between the Fund and the Fund’s “primary securities litigation counsel,”
Bernstein Litowitz Berger & Grossmann (“BLBG”).
The Fund Administrator repeatedly claimed to have no documents
disclosing the dollar amount of fees the General Counsel actually earned
in connection with specific class action litigations the General Counsel
recommended the Fund initiate against publicly traded companies—
despite the fact that the General Counsel himself stated the final
percentage, amounts and names of firms receiving such fees are always
reported to the Board.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

III.

The historic investment performance information provided by the
Fund’s current investment consultant for the period from 1988 through
today was neither prepared, nor confirmed, by the master custodian
bank actually holding the assets—the most reliable source for such
information.
Worse still, two decades of investment performance information was
prepared by a former pension consultant to the Fund who was
terminated as a result of an investigation by the United States Securities

43

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

and Exchange Commission (“SEC”). The SEC investigation concluded the
firm breached its fiduciary duty to its pension clients by misrepresenting
and omitting to disclose material information.

44

We are told the Board neither conducted nor commissioned any
meaningful review of the former consultant’s work—which included
advising on key issues such as asset allocation and money manager
selection—or potential damages to the Fund resulting from any fiduciary
breaches, subsequent to terminating the firm.
In response to our request for verified performance for the twenty-year
period, the master custodian indicated that it could not at this time
calculate performance for the period.
The performance information we were provided was inaccurate, at least
in part. In response to our questions, the current investment consultant
noted obvious inconsistencies in certain of the performance figures
provided.
Any analysis of investment performance data, portions of which, at a
minimum, are clearly wrong is inherently less reliable.
While we have (below) estimated Fund underperformance losses of
approximately $370 million, we simply do not know for certain how
well, or badly, the Fund’s investments have performed over the
decades—and, apparently, neither does the Board nor anyone else
currently involved with the Fund.
Certain significant information regarding potential conflicts of interest
and fees paid by the Fund (directly or indirectly in connection with
securities class action litigations), as well as fees paid by other
fiduciaries of the Fund, such as law firms, investment managers and

 consultants, to the Fund’s General Counsel was not provided despite
repeated requests.

We recommend that all information requests by Benchmark related to
this investigation, as well as all responses by the Board, Fund
Administrator and others, be made publicly available so that
stakeholders, including pension participants and taxpayers, are able to
evaluate for themselves the Fund’s level of transparency and the
integrity of its operations.
We understand that the City Council is subpoenaing the information
which we requested but did not receive from the Fund Administrator
and others and will provide any information it receives to stakeholders
and, if appropriate, regulators and law enforcement.
This report represents our expert opinions based upon material
provided by the Board, as supplemented by relevant information
obtained from other sources deemed reliable, including published
reports as noted. We reserve the right to amend this expert report
based upon any additional data and documents that become available—
including information we previously requested.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Information we requested regarding the expenditure of an estimated
$5.7 million in securities trading commission dollars “rebated” to the
Fund was not provided.

This report does not constitute legal, financial or tax advice and should
not be relied upon as such. Rather, it is an expert opinion based upon
certain evidence provided and reviewed.
45

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

IV.

“Red Flags” Related to Board Lack of Transparency

The Fund’s website proclaims that the Board of the Fund supports the
Florida "Government in the Sunshine" laws, designed to provide
transparency and openness in government operations.” A link to the
Florida Senate Website Archive is provided on the website through
which members of the public can search for the relevant statute.8
Florida's Sunshine Law regarding open government establishes a basic
right of access to most meetings of boards, commissions and other
governing bodies of state and local governmental agencies or
authorities.
Throughout the history of Florida's open government, its courts have
consistently supported the public's right of access to governmental
meetings and records.
As a Florida public pension, the Fund is subject to the Sunshine Law.
However, the Board has repeatedly come under criticism from citizens,
media, foundations and City Council members for failing to be
responsive to public records requests. Further, the Board has reportedly
spent hundreds of thousands of Fund dollars in litigation related to
requests for public records.
Most disturbing is the litigation involving citizen Curtis Lee’s request for
documents.
“Requesting documents from the pension fund triggered a showdown that has
lasted five years and counting — it is now at the Florida Supreme Court.

46
8

In our opinion, a direct link to the relevant statute would be more expedient.

 Before Lee could even touch the documents he wanted to look at, he was told he
would have to pay $326.
Lee said he would pay only for the documents he wanted to copy.

Lee sued.
A court last May ordered the pension fund to pay $75,000 of Lee’s legal fees. At that
point in the case, the pension fund had spent $290,000 in legal fees to fight Lee over
the public records case.
The legal bill has continued to grow, now inching toward $450,000, all over what
started as a $326 fee.”9

In the same article, a City Councilman expressed his disapproval:
“Shame on the police and fire pension fund [for always appealing] and taking it to the Florida
Supreme Court,” City Councilman John Crescembeni said. “This is a citizen spending his own time
and his own money trying to get information about an entity that is misbehaving. It is David
versus Goliath. It really is, and we know how that turned out.”

Barbara Petersen, president of the First Amendment Foundation was
quoted as saying, “Frankly, it burns me up that the pension fund would
be vilifying Curt Lee.”
According to the Florida Times Union, Lee’s access to public records
request ultimately led to fundamental questions regarding the history of

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The pension fund still wanted the $326, plus $280 to have someone monitor him
while he sorted through the records.

the City and the Fund’s negotiations of pension benefits.
“The access to public records paved the way for Lee’s 2011 suit against the pension
fund and the city of Jacksonville, alleging that the entities had a years-long history of
negotiating pension benefits in private, dating to talks that created the 30-year
agreement. Lee, with the concerned taxpayer group, asked that a judge toss the pact
47
9

http://jacksonville.com/news/metro/2015-05-17/story/curtis-lee-citizen-activist-jacksonvilles-donquixote-superhero-or-super

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

on the grounds the pension talks were conducted behind closed doors, which is
contrary to the state’s Sunshine Law.

48

“Even though the original disagreement was over the $326 issue, it is much more
important than that,” Dees (Lee’s lawyer) said. “I think it shows the importance of
citizens being able to access government records; because without that, we would
not have been able to build and support our case that they [the city and police and
fire pension fund] had negotiated pension benefits behind closed doors — always.”

The Florida Times Union also experienced seemingly unnecessary delays
in its public records requests. On August 13, 2015, the paper wrote:
“For instance, a records request initially filed in April wasn’t completed until a few
weeks ago. The specific information the paper was looking for took under two hours
to find, according to a calculation from the pension fund when charging the paper
for the record’s request.”10

As mentioned above, the Jacksonville Retirement Reform Task Force
Recommendations included enhancing transparency at the Fund.
Further, in a memorandum to the Jacksonville Ethics Commission from
Ethics Director Carla Miller dated November 3, 2014, Miller
recommended that “the PFPF Board give serious consideration to
ending expensive litigation and appeals over Sunshine issues, including
the Denton case (court upheld violations of the Sunshine Law in the
Wyse case) and public records case against Curtis Lee (hundreds of
thousands of dollars spent on a $350 initial cost for public records).”
In connection with this investigation on behalf of the City Council,
although we submitted our first document request on June 29, 2015,
not a single record requested was provided to us by the Board or Fund
Administrator for almost two months.
10

http://jacksonville.com/news/metro/2015-08-13/story/forensic-audit-stymied-delays-gettingrecords-pension-fund-city

 1. Our request was not a “public records” request. It was a request
by the City Council for records related to a pension substantially
funded by the City.
2. Action by the City’s Ethic Director, as reported in The Florida
Times Union, immediately preceded and apparently prompted the
late response in August to our June records request.
3. As a result of the Times Union article, the Board was on notice of
the inadequate response to our requests and should have taken
action to ensure full cooperation with this investigation.
4. The overwhelming majority of the documents requested, such as
annual reports and investment performance reports were
obviously readily available.
In the context of a forensic investigation into a highly controversial,
severely underfunded, underperforming public pension—a very public
investigation commissioned by the City Council—the delays, incomplete
and inconsistent responses, as well as failures to produce documents we
experienced amount to a profound “red flag,” in our opinion.
V.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

It is important to note the following regarding our initial request for
documents:

Board Failure to Provide Fiduciary Oversight - Delegation of
Broad Responsibility to Administrator and Outside General
Counsel

A five-member Board of Pension Trustees has sole responsibility for
administering the Fund. The Board provides investment oversight for
the management of assets and has adopted a Statement of Investment
Policy for the Fund.

49

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

50

As detailed throughout this report, in our opinion, the Board has failed
to provide oversight, consistent with its fiduciary duties, with respect to
matters as fundamental as verifying, evaluating and reporting
investment performance of the Fund over time; investment manager
and other vendor compliance with applicable state fiduciary and
heightened federal (ERISA) fiduciary standards; monitoring conflicts of
interest and establishing corresponding safeguards; and reviewing, as
well as assessing, the reasonableness of investment management and
other fees paid by the Fund.
The Board delegates responsibilities to the Fund Administrator for the
implementation of the Statement of Investment Policy and in the
provision of administrative oversight of the investment managers to
ensure that the Board’s policies are being properly implemented.
On the one hand, the Board has delegated exceptionally broad
responsibilities to the Fund Administrator, encompassing various
portfolio investment matters.11 On the other, the Fund Administrator
lacks any meaningful investment credentials.
The Board has also delegated broad responsibility to an outside law firm
subject to numerous potential conflicts of interest related to matters
11

The Administrator of the Fund is also charged with the responsibility for managing and directing all
administrative, personnel, budgeting, and support functions, including recommending the strategic
and tactical allocation of investment assets in consultation with the Investment Consultant. The
Administrator is charged with developing specified Asset Class investment portfolio objectives and
policy guidelines, and providing the Board with monthly and quarterly reports of investment activities
provided by the Investment Consultant. The Administrator has the responsibility for recommending
policies for maintaining diversified portfolios and maximizing returns with respect to the broad
diversified market standards of individual Asset Classes, consistent with appropriate risk constraints.
The Administrator is responsible for recommending changes respecting the appropriateness of the
goals and objectives in this Plan in light of actuarial studies and recommending timely changes to the
Board when appropriate. The Administrator is also responsible for ensuring that an appropriate
system of internal controls is developed to safeguard the assets of the Fund.
http://www.coj.net/departments/police---fire-pension-fund/statement-of-investmentpolicy/december-20-2012.aspx

 VI.

Board Lacks Errors and Omissions - Fidelity Bond Coverage

While the Board has required many, but not all, of the investment
managers to maintain errors and omissions insurance coverage of at
least $10 million,12 as well as a blanket fidelity bond satisfying ERISA
requirements,13 in response to our inquiry, the Fund Administrator
indicated that the Board and staff has no such insurance coverage.14
Currently, the cost of defending legal challenges to the Board’s actions,
e.g., denial of public records requests and allegedly illegal staff pensions,
is paid out of Fund assets (and ultimately by taxpayers and participants)
—as opposed to by an insurer. The Fund is also at risk regarding any loss
resulting from fraudulent or dishonest acts by the Board or the staff.
The Board has an obligation, as an ERISA fiduciary, to manage the Fund
exclusively for the benefit of participants. Opposing public records
requests or defending allegedly illegal staff pensions does not, in our
opinion, in any way benefit the Fund or its participants. Thus, in our

12

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

such as opining as to the legitimacy of a senior staff pension plan funded
by the Fund (and later deemed illegal by the City General Counsel);
splitting fees with class action law firms he recommended to the Board;
receiving client conference sponsorship fees from other plan fiduciaries;
and advice regarding retaining and later suing the former investment
consultant.

For example, see Sawgrass Asset Management contract dated October 1, 2013.

13

As an additional protection for plans, those who handle plan funds or other plan property generally
must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan
against loss resulting from fraudulent or dishonest acts of those covered by the bond.
14

It is our understanding that the City of Jacksonville Retirement System also lacks any such insurance
coverage.

51

 opinion, Fund assets should not be used to defend the Board, staff and
others in these matters.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

As ERISA fiduciaries, the Board should obtain errors and omissions
coverage to protect the Fund against loss resulting from errors or
omissions by the Board or staff, in our opinion.

52

As ERISA fiduciaries, the Board should obtain fidelity bond coverage to
protect the Fund against loss resulting from fraudulent or dishonest acts
of the Board or staff, in our opinion.
A copy of this report, as well any complaints filed against the Board or
staff, should be provided to any potential insurer.
Finally, as discussed below, as ERISA fiduciaries, the Board and staff may
be personally liable in the event of a breach of fiduciary duty, including
use of plan assets for personal benefit.
VII.

ERISA Fiduciary Standard Adopted for Board, Staff and
Service Providers

The Introduction to the Fund’s Statement of Investment Policy states,15
“Although the Board of Trustees acknowledges that the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), does
not apply to the Fund as a governmental retirement plan, it hereby
adopts the fiduciary provisions of ERISA. The Board, the Fund's staff and
the Fund's service providers shall discharge their responsibilities in the

15

http://www.coj.net/retirement-reform/docs/appendix/c-2---jpfpf-statement-of-investmentpolicy.aspx

 same manner as if the Fund were governed by the fiduciary
responsibility provisions of ERISA.”16

“The Board of Pension Trustees, in performing its investment duties, shall comply
with the fiduciary standards set forth in the Employee Retirement Income Security
Act of 1974 at 29 U.S.C. S. 11 04(a)(1 )(A) through (C). These provisions are attached
hereto as Exhibit B in the form of ERISA Section 404(a)(1)(A) through (C). However,
in case of conflict with other provisions of law authorizing investments, the
investment and fiduciary standards referenced under Section 112.661, Florida
18
Statutes, shall prevail.”

Finally, on page 35, specifically with respect to the Fund’s external
investment managers:
“The Fund’s Investment Managers shall discharge their responsibilities in the same
manner as if the Fund were governed by the fiduciary responsibility provisions of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Although
16

The City of Jacksonville Retirement System includes this same language in its Statement of
Investment Policy posted on its website.
17

18

Page 8.

ERISA Sec. 404. (a)(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge
his duties with respect to a plan solely in the interest of the participants and beneficiaries and – (A)
for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii)
defraying reasonable expenses of administering the plan; (B) with the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like character and with like
aims. (C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless
under the circumstances it is clearly prudent not to do so; and (D) in accordance with the documents
and instruments governing the plan insofar as such documents and instruments are consistent with
the provisions of this title or Title IV. (2) In the case of an eligible individual account plan (as defined
in section 407(d)(3)), the diversification requirement of paragraph (1)(C) and the prudence
requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by
acquisition or holding of qualifying employer real property or qualifying employer securities (as
defined in section 407(d)(4) and (5)).

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Later in the Policy,17 with respect to the Board, it is more narrowly
stated:

53

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

the Board acknowledges that ERISA does not apply to the Fund as a governmental
retirement plan, it hereby imposes the fiduciary provisions of ERISA upon each
Investment Manager whose performance shall conform to the statutory provisions,
rules, regulations, interpretations and case law of ERISA. Each Investment Manager
shall acknowledge within the investment advisory agreement that it is a fiduciary, as
that term is defined by ERISA, of the Fund.”19

ERISA is a federal law which protects the assets of millions of Americans
so that funds placed in retirement plans during their working lives will
be there when they retire. ERISA sets minimum standards for pension
plans in private industry.20
According to the United States Department of Labor (which enforces
ERISA), ERISA fiduciaries have important responsibilities and are subject
to standards of conduct because they act on behalf of participants in a
retirement plan and their beneficiaries. These responsibilities include:
 Acting solely in the interest of plan participants and their
beneficiaries and with the exclusive purpose of providing benefits
to them;
 Carrying out their duties prudently;
 Following the plan documents (unless inconsistent with ERISA);
 Diversifying plan investments; and
 Paying only reasonable plan expenses.21
An ERISA fiduciary also has an obligation to avoid transactions that are
prohibited (“prohibited transactions”) with respect to a pension plan.22

54

19

As noted elsewhere, not all investment managers handling Fund assets have so acknowledged.

20

http://webapps.dol.gov/dolfaq/go-dol-faq.asp?faqid=225

21

http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html

22

http://www.dol.gov/ebsa/fiduciaryeducation.html

 A fiduciary’s committing or allowing a violation of the securities laws
also may constitute a breach of the fiduciary’s duties under ERISA. This
theory may allow ERISA’s more generous enforcement scheme to be
applied to what are, in essence, securities law violations.
ERISA prohibits certain direct or indirect transactions between a plan
and a party in interest to that plan. Parties in interest with respect to a
plan include, among others: 1) all fiduciaries of the plan; 2) any person
providing services (fiduciary or non-fiduciary) to the plan; 3) any
employer or union whose employees are covered by the plan; and 4)
numerous parties affiliated with the foregoing in various direct or
indirect ways.23
VIII. ERISA Fiduciary Standard Highest Known to the Law
The fiduciary duty established under ERISA is recognized as the “highest
known to the law.”24

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Recent court cases have made clear that under the “exclusive benefit
rule,” fiduciaries have a duty not to mislead plan participants when
discussing plan-related matters. Some courts have begun to expand this
duty into an obligation not to mislead by omission or even to impose an
affirmative duty to disclose material information.

In addition to the general fiduciary duties described above, ERISA strictly
prohibits the fiduciary from engaging in a self-dealing transaction that
involves plan assets where a conflict of interest exists.25

23

http://www.groom.com/media/publication/145_erisa_for_security.pdf

24

Donovan v. Bierwith, 680 F.2d 263, 272 n. 8 (2d Cir. 1985).

25

Section 406(b) of ERISA prohibits the following self-dealing transactions:
• A fiduciary may not deal with assets of the plan in his own interest or his own account;

55

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The disclosure of a material conflict, alone, is never sufficient under
ERISA’s duty of loyalty and self-dealing “prohibited transaction”
provisions to avoid a violation of ERISA. Conflicts of interest are by
definition contrary to ERISA’s fiduciary duty of loyalty and self-dealing
prohibited transaction provisions.26
Failing to comply with ERISA’s fiduciary requirements can result in
significant penalties. ERISA provides that a fiduciary is personally liable
in the event of a breach of the fiduciary duty provisions. Furthermore,
ERISA provides the fiduciary may have to make good on any losses to
the plan caused by the breach and restore any profits gained by the
fiduciary in using plan assets to its own benefit.
IX.

Since the Board has adopted the heightened fiduciary standards of
ERISA in the Fund’s Statement of Investment Policy posted on its
website, stakeholders (including participants and taxpayers) may
reasonably assume that the Board has established policies and
procedures to ensure compliance with these standards. We found scant
evidence of compliance with ERISA fiduciary standards.
In our opinion, it appears ERISA fiduciary compliance has been largely
overlooked—despite the fact that these are heightened fiduciary

•

•

56

Lack of Compliance with ERISA Fiduciary Standard

A fiduciary may not act in any transaction involving the plan on behalf of a party whose
interests are adverse to the interests of the plan or the plan’s participants and beneficiaries;
or,
A fiduciary may not receive any consideration for his own personal account from any party
dealing with the plan in connection with a transaction involving plan assets.

26

http://www.groom.com/media/publication/1269_ERISA_Fiduciary_Comparison_to_Securities_Laws.
pdf

 For example, as mentioned below, Board failure to scrutinize investment
management fees—as required under ERISA fiduciary standards—we
estimate, alone, has resulted in $6 million in excessive fees paid each
year or $36 million over the past six years. The Board’s failure to
conduct or commission any review of the damage to the Fund caused by
its former investment consultant over two decades, choosing instead to
accept a settlement of a mere $273,696, for an estimated (based upon
GAO analysis) $300-$500 million in underperformance losses, was
exponentially costlier.
Our limited review of the investment management agreements27 and
subscription agreements between the Board and its asset managers
identified serious apparent ERISA non-compliance.
With respect to Fund’s investments in the Acadian Emerging Markers
Equity II Fund, Eaton Vance Institutional Senior Loan Fund, Silchester
International Value Equity Group Trust, and the Principal U.S. Property
Account, no “contract” was provided to us drafted by the Board
between the investment managers and the Board requiring the
managers to comply with the Fund’s Statement of Investment Policy,
including the ERISA fiduciary standards adopted by the Fund.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

standards, noncompliance can have serious consequences and there is a
risk of significant personal liability.

The Investor Subscription Booklet for the Acadian Emerging Markets
Equity II Fund LLC28 states that if the investor (the Fund) is not subject to
ERISA, the Fund acknowledges that Acadian may enter into certain swap
and other transactions and represents that those transactions by
Acadian will not result in a violation of any law to which the Fund is
27

We reviewed only the current investment advisory contracts between the Fund and its managers,
as provided by the Fund Administrator. These contracts were generally created in 2013.
28

We were not provided with and did not review any Private Placement Memoranda, Limited
Partnership Agreements or any other such documents related to the Fund’s investments.

57

 subject that is similar to the prohibited transaction provisions of ERISA
and represents that entering into such transactions is permissible under
the governing documents of the Fund.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The Fund Administrator indicated in the Acadian Investor Questionnaire
that the Fund was not subject to ERISA.

58

The Fund agrees to indemnify Acadian against all liabilities arising out of
any breach of any representation, warranty or agreement of the Fund,
including any misrepresentation related to the ERISA Questionnaire (to
be completed by ERISA investors only and which the Fund indicated was
“not applicable” and did not complete or sign).
Since the Statement of Investment Policy indicates that all Fund
managers, including Acadian, will be held to ERISA fiduciary standards,
then Acadian presumably cannot engage in any transactions that would
be prohibited for fiduciaries under ERISA, unless there is an applicable
ERISA prohibited transaction exemption.
For example, with respect to the payment of fees to the investment
manager or its affiliates (in addition to the management fee) in order to
avoid a prohibited transaction under ERISA, the prior written approval of
an independent fiduciary on behalf of the Fund may be required.
Brokerage, principal transactions and securities lending undertaken by
the manager may be impacted by ERISA prohibitions. As disclosed by
Acadian, ERISA compliance may require Acadian “to forgo certain
investments or other arrangements on behalf of the Fund that
otherwise may be desirable.”
An Independent Fiduciary may have to “acknowledge that none of the
Fund, the Investment Manager, or their affiliates, shall be responsible
for compliance by the plan or entity with the provisions of ERISA

 In short, it appears that Acadian may not be aware of its obligation to
manage Fund assets consistent with ERISA fiduciary standards and may
not be managing the Fund’s assets accordingly. While any such ERISA
fiduciary breaches could conceivably give rise to liability for losses, the
Fund has agreed to indemnify Acadian for any ERISA fiduciary breaches.
In the Eaton Vance Subscription Documents the Fund represented that it
was not an employee benefit plan subject to the fiduciary responsibility
standards and prohibited transaction restrictions of ERISA.30
Certain of the practices permitted in the agreement with the Fund’s
Master Custodian, Northern Trust, may be inconsistent with ERISA
fiduciary standards.
For example, the contract indicates that Northern may deposit cash in
any depository including its own banking department, without any
liability for the payment of interest thereon and receive “float” income
on uninvested cash. Also, the Board accepts that Northern may act as
principal on foreign exchange transitions providing such service at rates
established in its discretion and may retain any profit derived from such
service.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

requiring that investments of such plan or entity be diversified so as to
minimize the risk of large losses.”29

With respect to the investment advisory contracts between the Board
and Northern Trust, GAMCO Asset Management, Pinnacle Associates,
Eagle Capital Management; Brown Advisory; Thompson, Siegel &
Walmsley, Deprince, Race & Zollo, Inc., JP Morgan Investment
Management, it is stated that “the advisor acknowledges that it is a
29

Investor Subscription Booklet for the Acadian Emerging Markets Equity II Fund LLC, page 22.

30

Page C-7.

59

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

fiduciary with respect to the management of the assets of the Fund and
that it is subject to and shall be governed by the “prudent man rule” as
that term is defined and interpreted under ERISA.”31
This representation is not what is required under the Statement of
Investment Policy:
“Investment Managers shall discharge their responsibilities in the same manner as if
the Fund were governed by the fiduciary responsibility provisions of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”). Although the Board
acknowledges that ERISA does not apply to the Fund as a governmental retirement
plan, it hereby imposes the fiduciary provisions of ERISA upon each Investment
Manager whose performance shall conform to the statutory provisions, rules,
regulations, interpretations and case law of ERISA. Each Investment Manager shall
acknowledge within the investment advisory agreement that it is a fiduciary, as that
term is defined by ERISA, of the Fund.”

Further, the contracts drafted by the Board state, “The Board represents
that the Fund is not subject to ERISA.”
The Board contracts also state that the investment adviser shall have no
liability for any act or omission of a custodian or broker or dealer; if any
losses are suffered by the Fund, the Fund will seek any recovery or
pursue any remedy available against such custodian, broker, dealer or
31

60

Note: In addition to the language above, certain investment advisory contracts between the Fund
and Northern Trust (which serves as custodian to the Fund) also provide that NT “acknowledges that
it will be an Investment Manager of the Designated Fund as that term is defined by ERISA and a
fiduciary of the Trust Fund.” Further, in amendments to those agreements it is stated that any
securities lending will be in accordance with Department of Labor Prohibited Transaction Class
Exemption 2006-16 and that an Investment Fiduciary will authorize payment of fees to the affiliate
appointed as lending agent. The Harvest Fund Advisors contract states that the firm “acknowledges
that it is a fiduciary with respect to the management of the assets of the account and that it is subject
to all applicable provisions of ERISA (including Section 404 (a)).

 Under both the federal securities laws and ERISA, investment adviser
fiduciaries may be held responsible for acts or omissions of all such third
parties. For example, investment managers clearly have an obligation to
be diligent in selecting brokers to execute client trades.32
The agreements between the Board and the Board’s General Counsel
and investment consultant raise additional ERISA fiduciary issues
discussed below.
We recommend a complete review of the Fund’s policies, practices,
procedures and agreements for compliance with heightened ERISA
fiduciary standards. In the event that the Fund has suffered losses as a
result of ERISA non-compliance, damages may be recoverable from
responsible parties.
X.

Controversies Regarding Pension Staff

Pension staff consists of seven employees. The Executive DirectorAdministrator of the Fund since 1990 has been John Keane. In addition,
according to the Fund’s website:

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

third party as appropriate. The investment advisor shall have no
responsibility relating thereto.

“Mr. Keane has served as a member and Chairman of the Pension Advisory Committee, and
Member of the Board of Pension Administration. He was elected to the first Police and Fire
Pension Fund Board of Trustees when the Fund became independent of the City.”

32

Section 3 (a) in the contracts states that the investment advisor shall diligently execute transactions
in a method and manner and at such times as to procure best price and execution; 3(b) investment
advisor agrees to utilize commission recapture agents subject to its continuing duty to secure best
execution and where it is reasonable to do so; and 3(c) may place orders for execution with brokers
and dealers the advisor may select using reasonable efforts to obtain best available price and
execution. This language generally reflects the duties applicable to investment managers when
trading customer securities under the federal securities laws and ERISA.

61

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Mr. Keane also has been active in numerous public pension associations.
“John has served as an Executive Committee member of the National Conference on Public
Employee Retirement Systems, and served on the Administrator's Committee and Public
Employees Committee of the International Foundation of Employee Benefit Plans.
John served three terms as a member of the Executive Committee of the Coalition to Preserve
Retirement Security. He also serves on the Council of Institutional Investors Executive
Committee and is a member of the Government Finance Officers Association Focal Group.”

According to the Fund’s website, Keane frequently speaks at seminars,
conferences, and forums on public pension issues.
As mentioned earlier, the Board delegates responsibilities to the Fund
Administrator and Keane’s responsibilities are exceptionally broad,
encompassing various portfolio investment matters. Yet the Fund
Administrator lacks any meaningful investment education.
Keane is the first and — to date — only executive director of the city’s Police and
Fire Pension Fund. He does not hold an advanced degree in finance nor a related
academic field.
Keane, who never advanced up the ranks in the fire department, earned a top salary
of $56,000 a year as a firefighter.33

Most unusual, in addition to his role as Administrator of the Fund, Mr.
Keane has been the lead negotiator for police and fire unions in pension
reform negotiations.
“This is the only city in Florida where the city negotiated benefits with the pension
fund as opposed to the union,” attorney Bob Dees said.

According to former City General Counsel James C. Rinaman Jr.:
“There is no legal authority for the Fund to collectively bargain with the city for
pension benefits on behalf of the police and fire unions. There is an inherent conflict
62
33

Id.

 Mr. Keane has been a controversial figure as a result of his frequent
convention travel, over $400,000 in unused vacation pay and
“questionable deals for his personally created pension.”35
“When pension-reform negotiations begin in earnest, the lead negotiator for the
police and fire unions also will be negotiating for his own pension, a special,
multimillion-dollar retirement that is unusual in several respects:




He helped create it.
The city concluded it was created illegally and demanded that the millions
already spent to fund it be repaid.
It is a senior executive retirement plan, something common in private
business but rare for public servants. Unlike the union pension fund he
oversees, his is also pre-funded, which is far from common in business.

Despite the city’s cease-and-desist order, the money not only has not been repaid,
but more than $250,000 in city money has been added to the plan since the city’s
objections. Now his pension is fully funded.
The plan is paid for at the expense of the dangerously underfunded Jacksonville
Police and Fire Pension Fund.
And his personal pension has grown following a succession of five-figure pay
increases that have elevated his annual salary to more than $300,000.”36

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

of interest for the pension trustees to bargain for pension benefits. Their duties are
limited to administering and managing the pension funds, and negotiating for new
or increased benefits conflicts with performance of that duty.”34

34

http://jacksonville.com/news/metro/2014-05-03/story/while-john-keane-negotiates-jacksonvillepolice-and-fire-pension-fund
35

http://jacksonville.com/news/metro/2015-09-05/story/john-keane-one-several-board-memberscontroversial-special-pension
36

http://jacksonville.com/news/metro/2014-05-03/story/while-john-keane-negotiates-jacksonvillepolice-and-fire-pension-fund

63

 On August 29th, Mr. Keane gave three-week notice that he would retire
on September 18, 2015. However, at the Board’s insistence, he agreed
to stay on at the Fund through the end of the month.37 Most recently, it
is our understanding he has been engaged as a consultant to the Fund.
Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XI.

General Counsel Potential Conflicts-Compensation Disclosure

The legal counsel to the Board over the decades has been the
Plantation, Florida law firm of Klausner Kaufman Jensen & Levinson.38
The January 1, 2014 professional services agreement between the Board
and the law firm states that the firm has expertise in the area of public
employee retirement systems and is competent to perform the duties
required.
The agreement indicates that in addition to attending all meetings of the
Board; maintaining additional office hours at the offices of the Board;
reviewing contracts and other documents for legal form and
correctness; providing verbal and legal written opinions as requested by
the Board, the firm will review and supervise the services of any other
attorneys who may be retained by the Board. Further, the Board agrees
to “help defray the costs of reasonable educational materials to be
maintained at the office of the Board for use by the firm.”
In effect, the Klausner firm acts as the outside General Counsel of the
Board, supervising even other attorneys retained by the Board, as well

37

64

http://jacksonville.com/news/metro/2015-09-08/story/jacksonville-city-council-delays-lookinglegality-pension-departing
38

On its website the firm claims to have provided legal services to Jacksonville Electric Authority;
Jacksonville, Florida Retirement System; Jacksonville, Florida Sheriff’s Office.

 as recommending attorneys and litigations. In certain documents Mr.
Klausner refers to himself as General Counsel.39

The contract does not state that the firm, as a service provider of the
Board shall discharge its responsibilities in the same manner as if the
firm were governed by the fiduciary responsibility provisions of ERISA.
The Statement of Investment Policy of the Fund states, with respect to
“other external service providers,” that the Fund shall retain legal
counsel to provide support for the legal needs of the Fund. The Policy
includes an elaborate discussion of the fiduciary obligations specifically
applicable to any service provider, as well as disclosure and conflict of
interest prohibitions.
Unlike the contracts the Board has with many of the Fund’s asset
managers, the agreement does not require the law firm to maintain a
$10 million errors and omissions insurance policy or fidelity bond.
The agreement states that the Board will pay the firm at a $285.00
hourly rate, together with a $200.00 monthly retainer.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The agreement states that “the role of the attorney in representing the
Board is that of a fiduciary and the attorney shall act in accordance with
general principles of fiduciary responsibility.”

As ERISA fiduciaries of the Fund, the Board has a duty to review any
potential conflicts of interest related to the General Counsel and other
law firms providing services to the Fund and all compensation paid to, or
received by, these parties related to the Fund for reasonableness.
Likewise, as ERSIA fiduciaries, the General Counsel and other law firms
providing services to the Fund have an obligation to disclose any
65
39

November 18, 2008 memorandum to Board Re: Securities monitoring services.

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

potential conflicts of interest and all compensation they pay, or receive,
related to the Fund.
Based upon the limited information eventually provided by the Fund
Administrator, it does not appear that the Board has fulfilled its fiduciary
duty under ERISA to scrutinize the potential conflicts related to, and
reasonableness of, the compensation paid to, or received by, the
General Counsel and other law firms related to the Fund.
In an effort to identify all sources of compensation and potential
conflicts of interest related to the General Counsel, we requested the
following information from the Fund Administrator:
Please provide documents reflecting any compensation in any form, direct or
indirect, paid by any fiduciary to the Plan to the Plan’s attorney, Robert Klausner or
any of his related law firms or entities for the past 15 years. If you assert that the
Plan does not have these documents, please request that the Plan’s attorney
disclose this data to the Plan pursuant to their fiduciary duties to the Plan and
provide us proof of this request and response.

In response, the Fund Administrator provided only payee transaction
information indicating that the Fund (no other fiduciary) over the past
10 years (not the 15 requested) paid the General Counsel directly
approximately $2.72 million for professional services from October 2004
through August 19, 2015. The General Counsel provided no information
to us.40
1. Compensation to General Counsel From Class Action Law Firms
According to published reports (and the General Counsel himself), in
addition to the fees paid by the Fund to the General Counsel (e.g., the

66

40

Note: Our above request for information from the Fund Administrator included, but was not

limited to, any such legal fees paid by the Fund to the General Counsel.

 $2.7 million disclosed above), the firm may have received millions in
fees from one or more securities class action law firms retained by the
Fund to pursue litigation related to the Fund’s investments.

1. Recommends class action law firms to monitor the Fund’s
investments and pursue litigation related to portfolio securities;
2. Advises the Fund when to initiate or participate in a given lawsuit;
3. Negotiates (on behalf of the Fund) fees paid to these law firms;
4. Enters into fee-splitting arrangements with the firms he
recommends for class action litigations whereby his firm receives
a portion of the fees related to these cases.
According to Forbes:
“The outside counsel to the Jacksonville Police & Fire Fund, Robert Klausner of
Plantation, Fla., receives a varying cut of lawyer fees for work on cases he refers to
class action firms, on top of a retainer for routine work. Fund trustees seem largely
unaware of Klausner’s arrangement. “There are a lot of suits we’re probably
involved in because our attorney [Klausner] is involved in a lot of things,” says
Barbara Jaffe, a Jacksonville fund trustee and an adviser with Wachovia Securities.
Trustee Bobby L. Deal, a lieutenant with the Jacksonville police, says of Klausner:
“He’s on retainer. If there’s any other compensation, I’m not aware of it.” Klausner
says his pay is adequately disclosed and that it’s the job of the fund’s administrators
to keep the trustees well informed.41

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

As discussed further elsewhere, it is our understanding that the General
Counsel:

Note in the above article, it is stated that the trustees of the Fund
“seemed largely unaware of the General Counsel’s arrangement” and
the General Counsel stated that it was the job of the Fund Administrator
67
41

http://www.forbes.com/forbes/2004/0920/150.html

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

to keep the trustees well informed (of the class action contingency fees
his firm may have received).

68

For example, as discussed further below, the General Counsel
apparently received a portion of the legal fees paid in connection with
settlement of a Merrill Lynch Consulting Services Florida public pension
class action lawsuit in which the Fund participated.
The Fund has also served as “lead plaintiff” in multiple class action
cases. The lawyers representing the lead plaintiffs are generally awarded
the fees by the court and generally keep most of the fees.
Florida Rules of Professional Conduct applicable to lawyers effectively
provide that a division of fees between lawyers who are not in the
same firm may only be made pursuant to an agreement that fully
discloses that a division of fees will be made and the basis upon which
the division of fees will be made.42
Any potential violations of such rules regarding full disclosure of fees,
including any misrepresentation of fee arrangements by a lawyer should
be reported to the appropriate authorities. An apparently isolated
violation may indicate a pattern of misconduct that only a disciplinary
investigation can uncover and reporting a violation is especially
important where the victim is unlikely to discover the offense, according
to the Florida Bar.
We note with great emphasis that even if any such fee-splitting
arrangements among law firms may be permissible under certain
conditions prescribed by laws generally applicable to Florida licensed
lawyers, whether the General Counsel, as an ERISA fiduciary to the Fund,
may receive such fees and whether the class action firms, as ERISA
42

https://www.law.cornell.edu/ethics/fl/code/FL_CODE.HTM#Rule_4-1.5

 In general, full disclosure of the potential conflict of interest and amount
of any fees related to a transaction potentially involving fiduciary “selfdealing” would be required, at a minimum.
We repeatedly requested the following information from the Fund
Administrator:
“Provide contracts between the Plan and any class action securities law firms for
either monitoring or litigation from 2000 through the current year.”
In connection with the contracts, provide any documents that are related to any
referral fees or fee sharing agreements between any of these class action law firms
providing services to the Plan and any fiduciary, including attorneys, to the Plan. For
each of these agreements, please provide documents reflecting disclosure to, and
approval of, these agreements by the PFPF Board.”

While the Fund Administrator eventually did provide four portfolio
monitoring agreements between the Fund and securities litigation firms,
as discussed more fully below, he did not provide all contracts or
agreements with all class action law firms.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

fiduciaries, may pay such fees to the General Counsel in connection with
Fund litigation is an entirely separate matter. Any such dealings may
amount to “prohibited transactions” under ERISA fiduciary standards
giving rise to personal liability.

The Fund Administrator also repeatedly stated—contrary to written
representations by the General Counsel to the Board we reviewed—that
no portfolio monitoring agreement ever existed between the Fund and
BLBG.
With regard to the sharing of legal fees between the General Counsel
and class action firms, the Fund Administrator initially responded:

69

 No referral fees are paid to the General Counsel, nor does he bill the Fund for his
time working with the Class Counsel on these matters. His compensation, if any,
comes from the Court approved legal fees.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

In response to our inquiry about any court approved fees:
Please provide the court orders approving the payment of fees related to any case in
which the Fund has participated over the past 15 years as a lead or named plaintiff.

The Fund Administrator responded:
As I previously responded - We have none. All fees were Court approved in each
case. Court orders are in the files of the individual cases. WE do not have copies of
the pleading and other documents in these cases.

Shortly after the Forbes article (cited above) that mentioned fees the
General Counsel received for referring cases to class action firms, the
General Counsel wrote a letter to the Trustees, at the request of the
Chairman, to review prior discussions concerning the Fund’s role as a
lead plaintiff in securities litigation matters.
The September 20, 2004 letter stated that the Board entered into an
agreement with BLBG to monitor the Fund’s portfolio and email reports
were sent by BLBG to the Executive Director whenever a loss due to an
unlawful activity had been identified.
According to the General Counsel, the Board had adopted a policy to
delegate to the Executive Director and board counsel, the duty of
reviewing those reports and determining whether to participate in
litigation. In addition to a contingency fee agreement with the class
action litigation firm, the General Counsel’s firm would be paid a fee
from any class settlement in which the Fund participated.

70

We note the following statement in the General Counsel’s letter to the
Board:

 Thus, we asked the Fund Administrator:
In a letter dated September 20, 2004, Robert Klausner told the Board, "I usually
receive between 5 and 10% of the approved fee (in class actions). The final
percentage and dollar amount are always reported to the client."
Accordingly, please provide final percentage and dollar amount of all fees received
by the Klausner firm related to any class action litigation involving the Fund, as
disclosed to the Board. If the final percentages and dollar amounts were not
disclosed, please so indicate.

We received no response to this last email to the Fund Administrator.
While our requests for information regarding compensation to the
General Counsel in connection with class action litigations have
generally been unsuccessful, based upon the information we have
obtained from alternate sources, we estimate that the General Counsel
may have received the following compensation in addition to the $2.7
million paid directly by the Fund:
United Health Group: Plaintiff’s counsel awarded fee of $29,253,853.00
and costs of $514,591.78. Assuming the General Counsel received 10
percent of this amount or approximately $2.9 million, the fees from this
case alone may have exceeded total fees of $2.7 million paid directly by
the Fund over the past ten years.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

If a fee was paid, the amount and the names of the payees would be
reported in writing to the Board. No fee application or settlement
decision would be made without the Board’s prior approval. Fees, said
the General Counsel, “are usually between 15-18% of the recovery. I
usually receive between 5 and 10% of the approved fee. The final
percentage and the dollar amount are always reported to the client.”

71

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Merrill Lynch: $8.5 million settlement; fees awarded of $2.125 million.
The fees awarded represented 25 percent of the settlement—not the
15-18 percent the General Counsel told the Board usually applied.
Assuming the General Counsel received 10 percent of the approved fee,
he earned $212,500—nearly as much as the $273,696 the Fund received
from the Merrill settlement fund.
In connection with an Ernst & Young (Nextcard) settlement, of a $23.2
million offer made in April 2005, the General Counsel stated he would
receive 10 percent of the fee ultimately paid to BLBG. Assuming BLBG
received a fee of 18 percent and the General Counsel received 10
percent of that fee, the General Counsel may have received $417,600.
We note in this report that other Florida public pension lawyers claim
that class action firms routinely offer them 18 percent. If true with
respect to the General Counsel, then the total class action fees
estimated above may be significantly understated.
It is our understanding that the City Council will subpoena from the
General Counsel and all other lawyers that provide services to the Fund,
information regarding all payments to and between law firms directly or
indirectly related to the Fund. These parties should not object since,
according to the documents we have reviewed, they claim to have
already fully and accurately provided all such fee-splitting information to
the Board.
We note that the Fund pays the General Counsel $285.00 per hour for
his legal services. As ERISA fiduciaries, the Board should examine any
differential in the hourly rate he receives in connection with class
actions, as well as any percentages in lieu of hourly rates.
72

 2. Compensation From Fund Fiduciaries to General Counsel

“Bernstein Litowitz also pays Klausner a sum he won’t disclose (and which Berger
puts at up to $30,000) to be the only class action lawyers with access to Klausner’s
annual powwows of pension officials.”43

As fiduciaries to the Fund, in our opinion, both BLBG and the General
Counsel, at a minimum, have an obligation to disclose any potential
conflicts of interests, including any related compensation. Whether
either law firm, as ERISA fiduciaries to the Fund, may pay or receive such
fees is a separate matter.
Payments from BLBG to the General Counsel—who recommended BLBG
for highly-lucrative securities litigation—pose a significant conflict of
interest, as do payments from Merrill Lynch to the General Counsel.
As discussed extensively below, Merrill Lynch served as the Fund’s
investment consultant for nearly two decades, including in 2003 when,
according to The New York Times, Merrill paid to sponsor the Klausner
client conference.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

According to the same 2004 article in Forbes, the General Counsel may
have received additional compensation from law firms (not related to
legal services) and other fiduciaries of the Fund, such as investment
consultants and investment advisors managing Fund assets.

“Pension consultants aren't the only ones holding conferences where money
managers can hobnob with pension officials. Robert D. Klausner, a lawyer at
Klausner & Kaufman in Plantation, Fla., whose firm provides legal counsel to many
pension funds in Florida and elsewhere in the south, runs similar meetings.
Klausner & Kaufman's sixth annual client conference was in March at the Hyatt
Regency in Fort Lauderdale, Fla. Among the eight companies that paid to sponsor
43

http://www.forbes.com/forbes/2004/0920/150.html

73

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

the 2003 conference were Merrill Lynch and Davis Hamilton Jackson & Associates, a
money manager based in Houston that Merrill often recommends to its pension
clients.”44

The General Counsel advised the Fund on conflicts of interest involving
Merrill Lynch, as well as the decision to terminate Merrill and later
participated in litigation (resulting in fees paid to BLBG and his own firm)
against the Merrill.
We also note that Victor Zollo, President of the Fund’s longest domestic
equity investment managers, DePrince, Race & Zollo (which currently
manages approximately $110 million for the Fund and has managed
Fund assets since September 1994) was a speaker at the Klausner 2015
public pension client conference and the firm may have paid to sponsor
the conference.
Based upon interviews with past sponsors of the conference, it is our
understanding that the cost of sponsorship of the Klausner public
pension client conference remains at $30,000.
From late June through September 2015, we repeatedly requested
information from the Fund Administrator regarding any such payments
by Fund fiduciaries to the General Counsel.
In an email to the Fund Administrator on September 9, 2015, we asked
more specifically:
Please also disclose any payments, compensation, sponsorship fees, etc., the
Klausner firm or any person or entity related to the firm may have received over the
past 15 years from Merrill Lynch, BLBG or any other investment adviser, legal firm or
financial institution that is or was a fiduciary to the Fund, including payments in
connection with any conference organized by the Klausner firm.

74
44

How Consultants Can Retire on Your Pension, The New York Times, December 12, 2004
http://www.nytimes.com/2004/12/12/business/yourmoney/12pension.html

 In response the Fund Administrator simply stated “None from the
Fund.”

The Fund did not pay any sponsorship fees. What question did you ask that I did not
answer?

Our response:
I did not ask about payments from the Fund to the law firm and my question was not
limited to sponsorship.

Fund Administrator again responded to our original question:
Unknown.

Our response:
Are you going to ask your Fund counsel for this information?

There has been no further response from the Fund Administrator to this
question since September 9th.
It is our understanding that the City Council will subpoena from the
General Counsel information regarding any compensation received from
other Fund fiduciaries.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

When we indicated this answer was not responsive to the question and
asked again for an answer, we were told:

3. Retirement Reform Task Force Recommendation Regarding
Legal Counsel
As mentioned earlier, the Retirement Reform Task Force Final Report
noted that while the Fund had authority to employ separate counsel, it
should ordinarily use the Office of General Counsel of the City (the

75

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

“OGC”) for its legal needs. The Fund should consult with the OGC should
it find that it needed additional or separate counsel for specific
purposes, including the nature of the work and the fee arrangement.
The Report also noted that the Fund and the OGC had consulted
concerning the need for specific pension and retirement-related advice,
and the OGC indicated that she concurred with the engagement on such
matters of the Klausner firm, which was the current counsel to the Fund.
The OGC further indicated that she was familiar with and concurred with
the fee arrangement that the Fund had with the Special Counsel. The
Report stated that the OGC and the Special Counsel will consult regularly
to assure that the legal needs of the Fund are being competently and
efficiently handled for a reasonable fee (emphasis added).
In our opinion, the services provided by the General Counsel, the
compensation paid, directly and indirectly, and related conflicts of
interest should be examined to ensure compliance with applicable law.
XII.

Senior Staff Voluntary Retirement Plan

On July 30, 2012, the Times Union published an article stating that
“since the late 1990s, Fund Executive Director John Keane has been
signed up for a pension created for him by the fund with little outside
notice.”45 Both former City Council auditor Bob Johnson and current
council auditor Kirk Sherman are quoted in the article as saying they
were unaware of the existence of the pension program, which only
covered a handful of fund employees, until that month.
According to the article, the existence of this “Senior Staff Voluntary
Retirement Plan” was officially “recognized for the first time” in a

76
45

http://jacksonville.com/news/metro/2012-07-27/story/jacksonville-police-and-fire-fund-executiveslated-receive-another-city

 “The benefit, which could mean as much as $200,000 a year when he retires again,
comes atop the roughly $60,000 pension now being paid yearly to Keane in addition
to his $283,000-a-year salary as the pension fund’s executive director.”

Council auditor Kirk Sherman is quoted as saying “it appears that the
pension might be a better deal than the one received by members of the
fund Keane directs, because the size of the pension isn’t capped at 80
percent.” The pension also had a higher rate of accrual, according to
pension fund critic Curtis Lee, although Keane said he believed it
accrued at the same rate.
A council member was quoted as being shocked and concerned about
the fiduciary responsibility of the Fund.
In a release dated August 6, 2012, Carla Miller, Director of the city’s
Ethics, Compliance and Oversight Office stated that the above article
“raised questions in the community about this pension plan and that it is
the intention of the Ethics, Compliance and Oversight Office to study
this pension plan as to its formation and operation.”46
The City Council Finance committee discussed the issue of the
controversial staff pension plan during its hearing on the Fund’s budget
on August 10, 2012.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

recently released actuarial study of the Police and Fire Pension Fund.
The plan reportedly had $2.3 million in assets at that time, with the
money invested along with the Fund’s assets.

A. City General Counsel Opinion
On August 10, 2012, Cindy Laquidara, the City’s General Counsel, issued
an opinion that the Fund was not authorized under the City Charter to
77
46

http://jacksonville.com/news/metro/2012-08-06/story/jacksonville-ethics-officer-investigatepension-chiefs-special-benefit

 create the “Senior Pension Plan” and demanded the money spent to
fund the pensions be repaid.47

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

B. Ethics, Compliance and Oversight Office Opinion
Miller, the Director of the Ethics, Compliance and Oversight office
attended Fund meetings on August 15th, 17th and 28th. On Friday,
August 24th, documents were provided to her from the Fund in
response to her questions.
Miller issued her Interim Report on August 28, 2012 noting, “this plan
was created for 3 people working for the Fund that were already on city
pensions and were not eligible for another city pension nor were they
eligible for the State Retirement pension. The “Senior Pension Plan”
(“SPP”) was created in September 2000 by the Fund and benefits were
backdated.”48
According to Miller, there were two questions to be answered: is the
SPP legal and was it disclosed to City Council or to the City Council
Auditor in a meaningful, transparent and appropriate manner?
As to the legality of the plan, Miller noted there were two viewpoints:
“Office of General Counsel: The PFPB is set up under Article 22 of the City’s Charter
to manage a trust (the pension funds). It was not set up to create other pensions
with long term obligations to the taxpayers of Duval County. Specifically, in the
Charter under Section 22.07, it states “nothing shall empower the board to
amend...the pension plan without the approval of the Jacksonville City Council.”

47

http://jacksonville.com/news/metro/2012-08-16/story/jacksonville-city-halls-top-lawyer-sayspension-police-and-fire-pension

78

http://jacksonville.com/files/interactives/pensions/part-3--jacksonville-pension-crisis-jacksonville.com.html.
48

Interim Report, August 28, 2012 Office of Ethics, Compliance and Oversight.

 Setting up a separate “Senior Pension Plan” within the overall Police and Fire
pension plan is an unauthorized amendment to the Police and Fire Pension Plan.

The Fund: The position of the PFPF Board attorney, Bob Klausner, is that the city
Charter, Section 22.04 “General Powers” gives the Board the power under (e) to: “fix
the compensation of the administrator. It is the opinion of Mr. Klausner that, legally,
“compensation” includes the creation of a pension, by definition.”

Miller stated the disclosure inquiry was completely separate from the
question above regarding whether the SPP Plan is legal. In brief, the two
positions on this issue were, according to Miller:
“City Council Auditor: City Council Auditor states that his office was not aware of
the “Senior Pension Plan” until 2012.
Fund Director: In a letter to the ECO office, the PFPF Director states that the Senior
Pension Plan was disclosed in “Budgeted Pension Contribution Requirements” and in
the city’s accounting system.”

Miller noted that more documentation was needed on this issue.
“Where exactly is notice to the city on the Senior Pension Plan? Is it
clear and unambiguous?) Have independent audits of the City
recognized this liability and if not, why not? Citizens want to know not
only that the plan is legal and reasonable, but that it was transparent in
its implementation.”

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Also, Article 16 of the City Charter establishes the Pension system of the City and
does not authorize any agency other than City Council to create new plans.

On May 7, 2013, Miller sent a letter to General Counsel Laquidara
regarding the SPP stating:
“Representations were later made to the City Council that a lawsuit would be filed in
this matter. It has been 9 months since OGC issued its opinion on the Plan and a
lawsuit on this has not yet been filed by the City. Additionally, City Council Auditor
started an audit on the PFPF over a year ago. That audit has not been released to
date.

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 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

In February, 2013, a suit was filed by Randy Wyse of the Firefighter’s Union as to
whether or not the PFPB should be the entity (through its Director, Keane) to
negotiate for the firefighters union. The “Wyse” case is now in mediation, which
makes its proceedings confidential and not transparent to the public.
Since mediation is now occurring in the Wyse case and the lawsuit on the Keane
Senior Pension Plan has not yet been filed, I am concerned about the possibility that
the Director’s compensation and pension issues will be rolled into a global
settlement in the Wyse case. If this path is taken, I believe it would be detrimental to
the public trust. The public deserves an answer from the Court on the legality of
the special pension plan created by the Board for 3 people. If this “Senior Pension
Plan” is an illegal plan, it should be cancelled. If it is a legal plan, the Board and its
attorneys who approved it should be exonerated from any accusations that it
wasn’t legal.
It is my opinion that the issues involving special financial benefits to Director
Keane be handled separately and not be used as a bargaining chip to get other
issues resolved in the Wyse litigation. And, an audit on the Police and Fire Pension
Fund that has been worked on for over a year should be issued and made public so
that any findings in that audit can be considered in the litigation and settlements
(emphasis added).
Perhaps my apprehension of this scenario occurring is unfounded (and you are free
to clear up any of my misconceptions on this) but there seems no other way to
explain the delay in filing suit on the Plan which was announced 9 months ago.
The Wyse suit was filed in February-- only 3 months ago. While a global settlement
wrapping up all pension issues for the city is a laudable goal, it should not come at
the price of condoning potentially illegal and/or corrupt actions and in the absence
of the audit information.”

In conclusion, according to a July 13, 2015 email from Miller to Patrick
Greive:
80

“It was my understanding at that point that OGC was going to file suit in the matter.
City Council, I believe, passed a resolution directing OGC to file this suit. I turned
over any records I had to Loree French in OGC who was preparing the case so that it
could be filed. (But it never was.) Therefore, I did not do any further work on the

 situation until May 7, 2013, when I sent a letter to GC Laquidara about my concerns
with the case. On May 9, 2013, Mayor Brown announced his pension reform which
included a provision on the “illegal” pension plan. That version of pension reform
was voted down by City Council in June, 2013. That is all I have on the matter.”

The Council Auditor’s Office Police and Fire Pension Fund Audit report
dated November 21, 2012 was finally released to the public on July 18,
2013.
The audit questioned whether the plan was properly authorized, since
the City Council had not approved it and the City’s General Counsel had
stated the plan was not created legally. The audit said the plan had not
been disclosed to the state Department of Financial Services until 2011,
despite laws requiring actuarial reports every three years. Instead, the
audit found, the money to pay for the separate pension had essentially
been invisible, lumped in with the assets of the larger Police and Fire
Pension Fund.
“The Mayor’s Office and the City Council need to continue to pursue
changes in the state law to address the unconscionable structure of the
Police and Fire Pension Fund Board of Trustees. The Police and Fire
Pension Fund Board of Trustees is responsible for managing the assets
of the Police and Fire Pension Fund while the City is responsible for
funding the liabilities…Stated simply, the board controls the pension
assets while the city retains the liability to fund the pension
payments.”49

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

C. Council Auditor Report

81
49

http://www.coj.net/city-council/docs/council-auditor/police-and-fire-pension-fund-audit---report736.aspx

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

D. Fund General Counsel Opinion

82

In a letter dated May 20, 1999, the law firm of Klausner, Kaufman,
Jensen & Levinson opined to the Board of the Fund that it had the right
to grant a retirement plan to the Fund Administrator, as well as prior
service credit. In a letter dated November 2, 2000, the Klausner firm
provided an original final copy of the SPP for inclusion on the agenda for
the next scheduled Board meeting. The plan had been adopted by the
Board on September 20, 2000.
In a letter to the Board dated September 25, 2012, the Klausner firm
opined that the Board of the Fund had “the clear right to create and
maintain a retirement program for its employees as part of their
compensation.” The firm noted that its opinion as to the legality of the
plan, as originally expressed in 1999 (in connection with establishment
of the plan), remained unchanged. The 1999 and 2012 opinions focused
exclusively upon Florida law.
In 2012, the City Council voted unanimously to file a lawsuit regarding
the plan but, for whatever reasons, never did. While the City General
Counsel had gone so far as to tell the Fund to stop putting money into
the account, a large cash infusion of more than $250,000 reportedly
went into the account subsequently and effectively placed the account
at over-funded status. On September 21, 2015, the Jacksonville City
Council voted 18-1 to take legal action regarding the specially created
pension.

 As discussed earlier, the Fund adopted the heightened fiduciary
standards of ERISA in its Statement of Investment Policy. ERISA requires
pension fiduciaries (such as the Board, the Fund's staff and the Fund's
legal counsel) to generally refrain from any form of self-dealing and to
act solely in the interest of plan participants and their beneficiaries, with
the exclusive purpose of providing benefits to them.
It appears that neither City General Counsel nor the Fund General
Counsel reviewed whether, in connection with the establishment and
maintenance of the staff pension, the Board discharged its
responsibilities consistent with the heightened fiduciary standards of
ERISA.
In a recent article on the separate senior pension:
Dan Carr, a member of the Concerned Taxpayers of Duval County urged the council
to vote in favor of the resolution, designed to get a legal opinion on the matter.
He lambasted the creation of the special pension saying that it came at the expense
of the poorly funded pension fund which is about 43 percent funded while the
senior plan is fully funded.
“This is blatant discrimination against the rank-and-file [police and fire pension fund
members],” said Carr. “... The question is simply ‘is this plan legal?’ I urge you in the
defense of taxpayers and in the name of common sense to pursue this litigation.”50

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

E. Compliance with ERISA Fiduciary Standard

We recommend that the City Council in connection with any potential
litigation regarding the separate senior pension examine separately
whether the Board, consistent with its ERISA fiduciary duties, followed a
prudent process in deciding to take assets from the underfunded
83
50

http://jacksonville.com/news/metro/2015-09-08/story/jacksonville-city-council-delays-lookinglegality-pension-departing

 pension to establish, maintain and fully-fund the generous senior staff
plan.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XIII. Board and Staff Travel
Public pension trustee and staff travel to attend lavish conferences
globally, underwritten primarily by Wall Street (and, increasingly,
plaintiff class action securities law firms) seeking to garner asset
management and legal contingency fees from these funds has for
decades been highly controversial nationally.
“Critics of government spending – and some pension officials – say travel to exotic
destinations by those overseeing ailing pension funds is unseemly, especially as
taxpayers watch their public services diminish to offset growing pension costs.
“There’s no such thing as a free trip to Waikiki,” said Joe Nation, a professor of the
practice of public policy at Stanford University, who specializes in public employee
pensions. “Everybody loses; taxpayers will have to pay more, or beneficiaries will
have to pay more, or a combination of the two.”
Nation, a former Assembly Democrat from Marin, added that the pension managers
“would have higher returns and their beneficiaries would be better off if they were
to forgo this trip (to Hawaii) or travel close to home.”51

In 2005, the Rocky Mountain News ran a story criticizing the 16member board of trustees of the Colorado Public Employees'
Retirement Association for living the "life of a jet-setting retiree"
attending conferences in places like New Orleans, San Francisco, Miami
Beach, and Honolulu, as well as international destinations such as

84
51

http://californiawatch.org/money-and-politics/retirement-systems-send-members-hawaii-summit18817

 Trustees of Pennsylvania's employee pension fund also have come
under scrutiny. The Patriot News of Harrisburg reported that trustees
had spent more than $207,000 over a seven-year period traveling to out
of state conferences.53
So controversial are these conferences that the website for the 2013
National Conference on Public Employee Retirement Systems held on
the famed beaches of Waikiki, supplied board members hoping to shore
up support for their expenses-paid trip a “2013 Attendance Justification
Tool Kit.”
The site also included “7 Tips for Building Your Case for Attending the
Annual Conference,” which suggests that trustees emphasize how the
conference could help them “build a networking list” and identify ways
to help “save your fund money.”54
Both the Fund Administrator and General Counsel are regular
participants at these conferences and have long defended them.
The Klausner firm has served as general counsel for more than 15 years
to the National Conference of Public Employee Retirement Systems,
which organized the Hawaii conference mentioned above, billed as the
largest gathering of its kind for public pension plans.55

52

http://www.plansponsor.com/NewsStory.aspx?Id=6442463934

53

http://www.plansponsor.com/MagazineArticle.aspx?Id=4294991614

54

Id.

55

https://www.calpers.ca.gov/docs/board-agendas/201410/full/item11-02.pdf

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Madrid, China, Spain, and Paris—even as the pension reported its
funding ratio had slipped from 105.2 percent in 2000 to 70 percent.52

85

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Further, as mentioned in the 2005 article below, the Klausner firm
actually puts on its own annual public pension trustee and staff
conference.
“"People who are critics of these programs lose sight of the fact that trustees are
fiduciaries, and it is their responsibility to keep up with what's going on," says
Keane.
Even if not required by statute, pension trustees and senior staff at every public fund
in the country are required to participate in continuing education as an essential
element of their fiduciary responsibility, says Robert D Klausner, an attorney with
Klausner & Kaufman, PA, in Plantation, Florida. Klausner's law firm puts on an annual
educational conference for public fund trustees and staff.”
"If you have investments in Europe, sometimes you have to go see them; it's part of
a trustee's fiduciary duty," says Klausner. "If you buy timber in British Columbia, you
better go see it to make sure the trees are actually there. Sometimes trustees have
to put their feet on the ground at the location and eyeball the project or investment
themselves." Even though it may sound extravagant, going to China to learn
firsthand about investment opportunities in the world's fastest growing economy
can actually be prudent, he adds. Moreover, if a fund has direct ownership in any
real estate, fund trustees have an obligation to go and physically see that
investment. Klausner says that, in the past, there have been frauds that have
occurred when trustees did not go to make sure that what they invested in was
really there. Nor can this obligation be avoided by simply avoiding these types of
assets. Klausner says that, in today's economic environment, stocks and bonds alone
do not return enough money to meet the funds' actuarial needs.”56

In our opinion, the likelihood that public pension board members and
staff who lack investment experience will learn anything meaningful
regarding pension investing through travel to exotic locations is
remote.57
86

56

57

http://www.plansponsor.com/MagazineArticle.aspx?Id=4294991614

(Ironically, the greatest threat, in our opinion, to the financial integrity of the Fund–involving the
former investment consultant and extending two decades—was discussed extensively at a public

 ““We want to save money,” said Greg Frank, a management analyst for the San
Joaquin County Employees’ Retirement Association, a $2 billion plan covering
roughly 11,000 current and future retirees. “We give the trustees classes to attend
that are local, in places like Berkeley. It’s real easy to keep it in California and keep
costs down.”
In the same article California Assemblyman Bob Wieckowski is quoted as saying, “I
didn’t think that running up travel expenses and hotel rooms was a requirement of
getting educated. “We’re asking the public to show fiscal restraint, the cities and
counties and the state are providing less services, and people are paying more taxes.
So you would think these decision-makers would reflect that.”59

Further, the risks related to such high-stakes marketing junkets are
substantial and, in our opinion, far outweigh any educational benefit.
Wall Street money management marketers who gladly pay, by way of
example, for public pension trustees to take hot air balloon rides over
Albuquerque and helicopter rides over Maui at these conferences
obviously believe trustees will reciprocate by choosing them to manage
pension assets—resulting in rich asset-based fees. The potential for
corruption of the investment decision-making process at pensions,
resulting in higher fees and lower performance, is obvious and
enormous.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Even in those few states, like Florida, where board members are
required to fulfill an educational requirement,58 exotic and frequent
travel is unwarranted:

pension conference in Tallahassee in 2002 and at subsequent public pension conferences in Florida—
an issue which was not addressed by the Fund until years later.
58

Florida Statues require that local retirement system have investment policies that provide for the
continuing education of the board members in matters relating to investments and the board’s
responsibilities. Chapter 112.661 (14).
59

http://californiawatch.org/money-and-politics/retirement-systems-send-members-hawaii-summit18817

87

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

For example, Corporate (CorPERS) membership for the National
Conference of Public Employee Retirement Systems conferences alone
costs $10,000 per year; an exhibit booth costs and additional $17,500;
and registration runs approximately $5,000 per employee.
CorPERS members are also granted “speaking priority” at these
conferences and preferred status for conference presentation and
article proposals. According to NCPERS website, CorPERS Membership
“is designed to give your organization more visibility by increasing your
involvement in NCPERS and furthering our education and research
missions.”
There is broad consensus that the educational content of many public
pension conferences is suspect. Even the Fund’s General Counsel
acknowledged the abuses, as the Fund Administrator claimed the Board
monitored conference attendance for value.
"Are some of these things junkets versus legitimate education? There are some
conferences that are questionable," says Klausner.
Most public funds do have educational policies, and most must approve conferences
that trustees attend. Funds do this in different ways, Klausner says. Some funds
review and approve every conference prior to a trustee attending, while others
publish lists of acceptable and unacceptable conferences. Others have restrictions
on how many conferences trustees can attend, or limits on what can be spent. Other
funds limit international travel.
For example, the Jacksonville fund has a list of conferences that meet the fund's
business objectives, says Keane. Conferences are approved a long time in advance,
sometimes six to seven months. "We monitor course content for its value to our
ongoing program," says Keane.

88

Jacksonville has budgeted $70,000 for conferences for the 2005-2006 plan year for
its five trustees and seven-member pension advisory committee and staff.”60
60

Id.

 The Fund Administrator apparently attended the Institutional Investor
18th Annual Global Hedge Fund Summit held in Bermuda in April 2012—
even though the Fund is not permitted to invest in hedge funds.

According to a memorandum to the Jacksonville Ethics Commission from
Carla Miller dated November 3, 2014, during 2013 and 2014, the Ethics
Office received complaints concerning allegations of waste, abuse and
ethics violations pertaining to the travel of John Keane (Executive
Director of the Fund) and Bobby Deal (Chair of the Board).61
Miller noted that this review was done solely on records provided by the
Fund on the specific complaints. It did not include the complete travel
records of Mr. Keane and Mr. Deal.
John Keane took 31 trips from October 2010 through February 10,
2014. Two were out of the country (Scotland and Canada).62 Hotels
included Caesars Palace, Hotel Frontenac, Four Seasons, and Trump
Tower.
Bobby Deal took 18 trips in the same time period as Keane.
Many of the trips taken by Keane and Deal were sponsored by Opal
Financial Group and similar conference planning organizations.
According to the conference agendas, Fund officials typically speak on a
panel for an hour or less, and in exchange, get travel, registration and
hotel expenses for several days paid by the "educational” institute.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

A. Ethics, Compliance and Oversight Office Review of Keane and
Deal Travel

61

Summaries of the allegations in the complaints are contained in the Ethics Director’s reports to the
Jacksonville Ethics Commission on cases 2013 (5-7) and 2014 (1-3).
62

Apparently the Bermuda trip mentioned above was not included in the records provided by the
Fund.

89

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

As mentioned above, investment professionals pay tens of thousands of
dollars to attend these conferences and thousands more to entertain
potential public pension clients.
According to Miller, it appeared that all of the trips were approved by
the Fund Board, “whose members are sometimes the ones taking the
trips. The trips are listed on the agenda for their meetings and are
approved. There is no other PFPF policy or procedure on trips. According
to information provided to the Ethics Office by Mr. Keane, the PFPF
travel policy is: Educational conferences are approved by the Board. He
further indicated that “travel required to perform duties (attending a
legislative or congressional hearing, court hearing, or manager
meetings) does not require Board authorization.””
Miller concluded, “There is a lack of analysis and/or oversight of the
many trips taken as to their value to the PFPF Fund.”63
The Ethics Director recommendations to the Ethics Commission included
additional review of Keane and Deal travel by the Council Auditor. “The
requested scope of the audit should include an analysis of travel,
whether members of the board are seeking out public speaking
engagements, who is reimbursing such expenses (and whether there is
any business relationship or potential relationship with the PFPF), and
an assessment of the PFPF Board current travel policy. The Police and
Fire Pension Board "PFPF" should review the usefulness and return on
investment of the 50 plus trips taken by Mr. Keane and Mr. Deal.”
63

90

Miller’s report also noted, “In April, 2013 the Times Union reported: Jacksonville pension fund chief
gets $160,000 for unused leave. “Under my contract I can sell it,” said Keane, who receives six weeks
of vacation time a year. “It’s all perfectly legal.” The move was unanimously approved by the Police
and Fire Pension Fund Board, which passed it as part of its consent agenda. The magnitude of the sale
was not apparent from the agenda, which described the item as a memo from the executive director
to the board concerning leave payments."

 Most recently, Keane’s travel has emerged as an issue in connection
with the estimated almost $475,000 he has already and is expected to
collect for unused vacation days in the past five fiscal years.
An investigation by the city’s ethics office last year revealed that Keane has criss-crossed the
country and globe.
He’s stayed in places like Caesars Palace and Trump Tower when he went on 31 trips from
October 2010 through February 2014.
Two of those trips were out of country, including Scotland.
Most of the trips under review by the city’s ethics commission were sponsored by a financial
group which hosts pension forums. Most of the trips, according to Keane’s travel summary
provided by the pension fund to the ethics commission, were for two to three days.
Some of the trips, such as the one to Scotland, do not specify the length of the trip. Neither did
the trips to San Francisco or Boston in 2013.
Between Sept. 26, 2012, and Feb. 19, 2013 — that’s five months — Keane went to Scotland,
Arizona twice, San Francisco and Las Vegas.
Accompanying him on a bulk of the 31 trips that were under review was then longtime chairman
of the board of trustees Bobby Deal, an assistant police chief of the Jacksonville Sheriff Office.64

In summary, given that: (1) public pension trustee and staff travel to
lavish conferences globally has generated controversy for decades
across the nation; (2) the Board and Keane’s travel has been intensely
criticized locally (including an Ethics, Compliance and Oversight Office
Review); and (3) the severely underfunded status of the pension, it is
recommended that the Board and staff eliminate such non-essential
travel.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Just because Keane hasn’t used any vacation time doesn’t mean he has stayed put.

Most important, extensive travel by the Board and staff is inconsistent
with the fiduciary obligation under ERISA to manage plan assets for the
exclusive benefit of the participants, in our opinion.
91
64

http://jacksonville.com/news/metro/2015-09-19/story/jacksonville-police-and-fire-pension-chiefcashing-out-unused-vacation

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XIV. Communications with United States Securities and Exchange
Commission
We requested from the Fund Administrator any correspondence
between the SEC and the Fund for the past ten years. According to the
Fund Administrator, the only such correspondence relates to the
Commission’s investigation of the Fund’s former investment consultant,
Merrill Lynch, as described below.
XV.

Investment Management Fees

Unlike most other industries, the fees money managers charge
institutional and retail investors for comparable investment services
vary astronomically.
Passive, or index investment management services, can be purchased by
institutional investors for 1 basis point (one one-hundredth of a percent)
or even “for free.”65 Active traditional asset managers who attempt to
beat the market by stock-picking, may charge pensions investment
management fees that are 120 times greater (1.2 percent). Alternative
investment managers, including real estate, hedge, venture and private
equity, may charge asset-based, performance and other multiple layers
of fees amounting to 8-10 percent—1,000 times greater fees than
indexing.
For example, according to a Prospective Fee Analysis prepared by the
Fund’s investment consultant specifically for our review (discussed more
fully below), Northern Trust is paid a 5 basis point investment advisory
fee for the first $100 million and 2 basis points thereafter on Fund assets
it manages in an S&P 500 Index Fund. The prospective fee on $131

92
65

Certain index managers will manage large accounts at no cost, in exchange for securities lending
income related to the portfolio.

 Paying higher fees for active traditional or alternative asset
management does not guarantee and, in fact, negatively correlates to
superior investment performance. Indeed, the overwhelming majority
of active managers fail to outperform market indexes over time net of
fees. The higher the fees, the greater the drag on investment returns.
For example, the July 31, 2015 Flash Report indicates that on a net basis
the Fund’s US Equity; International Equity; and Fixed Income actively
managed assets—amounting to approximately 83 percent of the Fund’s
total assets—have underperformed their respective indices for virtually
all 1, 3, 5 and 10-year periods.
A recent report by the Maryland Public Policy Institute and the Maryland
Tax Education Foundation which examined the investment fees and
investment performance of state pension funds concluded:
“State pension funds, including Maryland, have succumbed for years to a popular
Wall Street sales pitch: “active money management beats the market.” As a result,
almost all state pension funds use outside managers to select, buy and sell
investments for the pension funds for a fee. The actual result — a typical Wall Street
manager underperforms relative to passive indexing — is costly to both taxpayers
and public sector employees.
For example, the top ten states — in terms of Wall Street fees — had a lower
pension fund investment performance — over the last five fiscal years — than the
bottom ten states (emphasis added)... State pension funds should consider indexing.
Indexing fees cost a state pension fund about 3 basis points yearly on invested
capital vs. 39 basis points for active management fees (or 92% less)… By indexing
most of their portfolios, we conclude the 46 state funds surveyed could save $6

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

million is 4 basis points or $52,676. At the other end of the spectrum, JP
Morgan is supposedly paid a twenty times greater investment advisory
fee of 1 percent, i.e., $1.27 million on the $127 million in Fund real
estate assets it manages.

93

 billion in fees annually, while obtaining similar (or better) returns to those of active
managers.”66

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

1. Fiduciary Duty to Monitor Fees
It is well established that sponsors of public and private retirement plans
have a fiduciary duty to ensure that the fees their plans pay money
managers for investment advisory services are reasonable. Fees paid for
such retirement plan investment services have always been an
important consideration for ERISA retirement plan fiduciaries. Further,
in recent years such fees have come under increased scrutiny because of
class action litigation, Department of Labor regulations, and
congressional hearings.67
According to the Department of Labor:
“Plan fees and expenses are important considerations for all types of retirement
plans. As a plan fiduciary, you have an obligation under ERISA to prudently select
and monitor plan investments, investment options made available to the plan’s
participants and beneficiaries, and the persons providing services to your plan.
Understanding and evaluating plan fees and expenses associated with plan
investments, investment options, and services are an important part of a fiduciary’s
responsibility. This responsibility is ongoing. After careful evaluation during the
initial selection, you will want to monitor plan fees and expenses to determine
whether they continue to be reasonable in light of the services provided.”

Local government pensions are exempt from ERISA and are governed by
state law. However, because ERISA and state law protections both stem
66

94

Wall Street Fees, Investment Returns, Maryland and 49 Other State Pension Funds by Jeff Hooke
and John J. Walters, July 2, 2013. The authors reviewed the Wall Street money management fees of
all 50 states and the states five-year annualized investment returns. The information was disclosed in
the state pension funds’ CAFR.
67

Revealing Excessive 401(k) Fees, The New York Times, June 3, 2011.

 from common law fiduciary and trust principles, best practices for public
pensions are frequently similar to those found in ERISA.

At the outset, sponsors of public, as well as private retirement plans
must take steps to understand the sources, amounts, and nature of the
fees paid by the plan, as well as the related services performed for such
fees. After all, a plan sponsor cannot determine the reasonableness of
fees paid without a comprehensive understanding of the plan’s services
and fees.
Whether a plan’s fees are reasonable depends upon the facts and
circumstances relevant to that plan. The plan sponsor must obtain and
consider the relevant information and then make a determination
supported by that information.
2. Lack of Board Review of Investment Fees
We requested from the Fund Administrator any analyses that may have
been prepared for the Board to scrutinize whether the fees the Fund
pays its asset managers are reasonable.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Again, in this case, the Fund has adopted ERISA fiduciary standards
which include the duty to monitor the reasonableness of all fees.

Remarkably, according to the Fund’s investment consultant, Summit
Group, no fee analyses have been prepared for the Board by Summit or
any third party for this $1.43 billion pension.
“The fees are buried in the investment performance reports,” we were
told. There have been no presentations to the Board specifically related
95

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

to fees. However, according to Summit, the Fund Administrator had
instructed the firm to prepare the first such report for our review.68
In our opinion, without a comprehensive fee analysis prepared by the
investment consultant or a third party, the Board cannot fulfill its
fiduciary duty to monitor the reasonableness of fees the Fund pays its
investment managers.
3. Lack of “Most Favored Nation” Contract Provision
Pensions seeking to ensure they pay the lowest investment advisory
fees managers offer often require the managers they hire to agree to a
“most favored nation” provision or “mfn.” The mfn provision generally is
included in the investment advisory contract between the pension and
the investment manager. In other cases, the advisory contract will be
silent on the issue but the manager will be required to certify quarterly
or annually that the client is receiving the lowest fee.
The Fund has no mfn provision in any of its contracts with investment
managers and does not require managers to certify quarterly or
annually that the Fund is receiving the lowest fee they offer.
However, the current investment consultant to the Fund, Summit
Strategies agrees that mfn provisions are commonplace, particularly
with respect to public pensions and helpful in reducing fees.69 Why the
Fund has operated without these cost-saving provisions in its contracts
with managers is puzzling.70
68

According to Dan Holmes, the fees paid to the Fund’s managers are not included in the Investment
Performance Reviews presented to the Board but are “buried in the Flash reports.”
69

96
70

Interview with Dan Homes, September 10, 2015.

Mr. Holmes notes that his firm merely negotiates fees with managers on behalf of the Fund but
does not draft the contracts between the Fund and its managers—contracts which could and should,
in our opinion, include an mfn provision.

 In brief, an mfn provision states that the manager represents the fee the
client pays is the lowest the manager offers to “similarly situated”
clients. The mfn does not require the manager to represent the pension
is paying the lowest effective fee the manager offers to anyone—only
the lowest fee offered to “similarly situated” pensions.
While mfns are common among pensions, they vary considerably in
their wording and complexity. For example, one fund we advised
required its managers to complete a quarterly questionnaire containing
the following simply worded question which served as the fund’s mfn
clause: “Do any accounts of similar size and with similar assets under
management pay lower fees than this plan? If yes, please explain.”
Below is the substantially lengthier mfn of another pension fund of
comparable size. (As you can see, the size of the fund does not dictate
the specificity of the mfn.)
“If, at any time from and after the execution date of this Agreement, the Investment
Manager enters into an agreement with any other client to provide investment
management services comparable to those provided under this Agreement, and if
such agreement requires the payment of fees that are in any respect lower than the
fee established in this Agreement, the Investment Manager agrees that the fee
required under this Agreement shall be reduced to the level specified in the
agreement with such other client.
Principal variables which shall be utilized to determine whether the services are
comparable include, but are not limited to, size of account, restrictions on the
account, aggressiveness of investment objectives and discretionary character of the
account. Such reduction in fees shall be effective as of the effective date of the
agreement with such other client. The Investment Manager agrees to provide the
Board with timely written notice of any event or occurrence that would require a
reduction in fees provided under this Agreement. Further, the Investment Manager

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Further, as discussed below, in our opinion the fees the Fund pays could
be dramatically reduced.

97

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

represents and warrants that the fees provided under this Agreement do not exceed
those currently charged to other clients receiving comparable services.”

98

Due to the variation in the wording and complexity of mfn provisions,
the issue of compliance with these clauses is a subject of intense
concern among money managers. Firms differ in their understandings as
to the meaning of such clauses in their clients’ contracts. A single large
investment advisory firm may be subject to hundreds of mfns in their
contracts with pensions. Larger firms may have internal compliance
professionals to review contracts for mfn compliance. However, the size
of the firm does not guarantee compliance.
Smaller firms, on the other hand, may lack the resources to monitor
compliance. For decades, one of the four biggest issues of concern to
pensions and money managers alike has been mfn compliance.
Unfortunately the language in most mfn clauses is open to tremendous
interpretation. Managers may contend a client paying a lower fee is
receiving a different asset management service and therefore the mfn
clause has not been violated.
Accounts paying “performance fees” are routinely considered exempt
from mfn compliance by managers since performance fees typically
involve low or no minimum fees and higher than usual maximum fees if
the manager performs well.
Managers may believe “similar accounts” only includes other public
pension funds and not corporate pensions or endowments and
foundations. For example, one manager we recently interviewed
candidly indicated that while he “might have a church account paying a
lower fee,” he was still in compliance with our client’s mfn. “Wrap fee”
accounts are also generally not considered “similar” by managers for
mfn compliance purposes.

 Another problem with “most favored nation” clauses is they rely upon
managers coming forward in good faith to notify the client it is entitled
to a fee reduction, perhaps years after the initial fee negotiation. Many
managers cannot be relied upon to volunteer such information against
their financial interests. Therefore, where possible funds should contact
other pension clients of their managers to determine whether the fee
they pay is the same or lower. Pensions should also review managers’
Forms ADV on the SEC’s WebIARD system for information regarding
their advisory businesses, such as percentages of institutional and retail
clients and participation in “wrap fee” programs.
In the investigations we have undertaken involving blatantly excessive
investment advisory fees, managers generally respond that the account
managed for our pension client was unique and therefore any
comparisons with other accounts of the manager, with lower fees, is
inappropriate. In other words, the explanation for unusually high fees is
that there is something unique about the investment mandate or
account. Such manager explanations are hollow to those experienced in
investment management matters. Fortunately for managers, many
pensions are not sophisticated, or even informed, regarding the
investment advisory fees funds actually pay.
Managers charge certain funds unusually high fees because they can. In
other words, either the pension’s investment consultant or the fund’s
board itself has not effectively negotiated fees. Pensions that rely upon
“most favored nation” provisions to ensure they are paying the lowest

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

In summary, managers have become very skilled at distinguishing
between clients and accounts in order to justify different fees for
“similar accounts,” yet maintain they are in compliance with mfn
clauses. On the other hand, few pensions even attempt to monitor
compliance with their mfn clauses. Thus, managers who fail to comply
have little to fear. Managers who are questioned by clients need only
develop a plausible explanation for fee differentials.

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 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

possible investment advisory fees are missing the boat. A “most favored
nation’s” provision is no substitute for informed, vigorous fee
negotiation. Finally, funds that fail to continuously monitor “most
favored nation” compliance are likely to be unaware of fee reductions to
which they may be entitled.
4. Maeva 2013 Fee Analysis
Jonathan Trichter of MAEVA Municipal Solutions, Inc., who was part of
the professional team assembled by the Pew Foundation and the Laura
and John Arnold Foundation briefly addressed the Fund’s investments,
performance and fees in his remarks to the Jacksonville Reform Task
Force Committee Meeting in October, 2013.71
Trichter stated that “one overlooked but key contributing factor to the
Fund’s performance over time is the outsized amount of administrative
and investment fees it pays.” According to Trichter, the professional
services and administrative fees the Fund paid in FY 2013 as a
percentage of assets amounted to 78 basis points—more than double
the all-in costs of 30 basis points paid by the Florida Retirement System.
Trichter noted that there were a number of reasons the Fund had been
paying too much in expenses and fees, including that the Fund was overemphasizing active management of its portfolio. The Fund’s
recommended target portfolio for FY 2012 contained only about 17
percent passively managed investments and the recommended target
for equities was 83 percent active. The Fund’s target for large cap
equities—the most efficient market there is—was two-thirds active and
one-third passive. Trichter noted that CalPERS—the nation’s largest
public pension—equity allocation for active and passive was almost
inverted.

100
71

The Jacksonville Pension Reform Task Force Committee Meeting-10-29-13, Prepared Remarks by
Jonathan Trichter, MAEVA Municipal Solutions, Inc., Amended 11/5/13. .

 As mentioned above, the Fund Administrator instructed Summit Group
to prepare the first-ever Prospective Fee Analysis of the Fund for our
review. No such analysis has ever been prepared for the Board in the
past, we were told.
The Analysis prepared by Summit was based upon eVestment Alliance
fee data.
According to a representative of eVestment, the firm does not provide
fees “on a level as granular as client type, such as public pensions. Fee
schedules provided within eVestment are meant to be a starting point
for conversation and as a broad representative of what their fee
schedules typically are for that vehicle type.”72
Other pension investment consultants, such as Callan Associates, Inc.,
provide more meaningful fee data, segmenting the fees paid by various
fund sponsor type. Most relevant here, according to Callan, public
pensions pay the lowest fees regardless of account size, typically a 10-15
percent discount to their corporate plan and endowment and
foundation peers.73 Thus, the eVestment style peer fees upon which the
Summit analysis is based are almost certainly materially higher than
those paid by public pensions, such as the Fund.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

5. Summit Strategies Prospective Fee Analysis (YE 6/30/2015)

Further, according to eVestment, the fees included in the Summit
analysis are based upon “published” fee schedules, as opposed to the
fees public pensions actually pay. “Published” fees are the fees
managers include in their advertising materials—not the fees clients
actually pay.
72

Email from Christina Molina, Evestment September 15, 2015.

73

See, for example, Callan Associates Inc. 2004 Investment Management Fee Survey, pg. 26.

101

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Institutional clients routinely pay 10-15 percent less than managers
“published” fees for accounts less than $75 million and larger discounts
exist between “published” and “actual” fees for accounts larger than
$75 million.74 Thus, “published” fee data is of limited utility to plans
seeking guidance regarding reasonable fee levels. Again, other
consultants, such as Callan, provide “actual” fee data.
Even based upon the Summit analysis (which, for reasons stated above,
we believe is deeply flawed) the fees paid to virtually all the U.S. Equity
investment managers are 50 percent higher than they should be, in our
opinion. For example, the Fund will pay Eagle Capital Management 76
basis points or $664,412 when the median peer fee in the Summit
analysis is 51 basis points or $445,855.
Again, the peer fee stated in the Summit analysis is based upon
“published” fees. The average “actual” fee paid by public funds for an
account of this size ($87 million) is likely to be approximately 30 basis
points, or $262,267, based upon our data.
6. $6 Million in Excess Fees Paid Annually
In our opinion, all of the investment advisory fees the Fund pays its
managers should be fully disclosed to the Board and compared against
“actual” public pension fees, as well as, if need be, vigorously
renegotiated. The emphasis on active management should, as noted by
MAEVA above, be reexamined.
In our opinion, investment costs could easily be dramatically reduced,
saving the Fund perhaps $6 million annually and, more importantly,
improving performance.
102
74

Examining Active Investment Advisory Fees: 2003 “Actual” Fee Survey of 100 Pensions by
Benchmark.

 In conclusion, we do not believe that the prospective fees for YE
6/30/15 amount to only 48 basis points or almost $8 million, as
indicated in the Summit analysis. Rather, we estimate total fees are $10
million or more annually.
XVI. Investment Performance
1. Suspect Performance Records
The Statement of Investment Policy of the Fund states that the
investment performance of the pension assets will be measured by an
independent performance measurement firm (the “Investment
Consultant”) and evaluated on a monthly basis.
According to an email from the Fund’s Administrator,75 Northern Trust
(which has been the Master Custodian for the Fund for over a decade)
cannot provide investment return information on a gross and net basis
because the bank was not engaged to report on the Fund’s performance
in the past and cannot create a performance history at this time.76

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

For managers that utilize performance-based fees, the prospective fee
in the Summit analysis includes only the base fee and not any
performance component. We note that with respect to real estate and
Master Limited Partnerships, all applicable fees have not been included
in the Summit analysis.

While the custodian, Northern Trust, can and does provide performance
information to pensions, the Board chose to have the former investment

75

Email from John Keane August 25, 2015, quoting Richard F. McConville, Senior Vice President
Northern Trust.
76

Joey Greive, Treasurer of the City, independently confirmed with Northern that it could not provide
a verified performance history.

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 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

consultant, Merrill Lynch and now Summit, provide it. This is highly
problematic because:
a. The custodian, as holder of the Fund’s assets, is always in the best
position to verify values and performances of the respective
investment managers;
b. The consultant and the managers are subject to a conflict of
interest in calculating performance; and
c. Here, as discussed extensively below, the integrity of the former
consultant to the Fund—the party calculating performance over a
two decade period—was challenged by regulators.
As a result, according to the Fund Administrator, the only performance
reports that exist at this time for the 20-year period when Merrill Lynch
was the investment consultant were prepared by Merrill—information
which has not been verified by the custodian holding the assets.
Further, the current investment consultant, once retained, undertook
no analysis of Merrill’s performance reports. Summit was never asked
by the Board to verify the Merrill performance; rather, Summit simply
accepted “a giant spreadsheet in 2007 from Merrill and uploaded it into
the Fund’s performance history.”77
On September 2, 2015, we received via email an Excel spreadsheet from
Summit which purported to show on a calendar year basis,78 the total
fund gross return; total fund net return and total fund market value. In
the email Summit noted that returns, as requested, went back to 1988
and that Summit first began calculating investment returns in December

77

104
78

Interview with Dan Holmes, Summit Strategies, September 10, 2015.

Note that the performance included in the Fund’s independently audited financial statements is on
a fiscal year basis.

 When we asked whether, in Summit’s professional opinion, the Merrill
performance data was accurate, the consultant responded, “Regarding
Merrill Lynch's calculation of investment performance, I do not have
sufficient information from which to form an opinion as to the accuracy
of return calculation. Although on the face of it, I would expect there
to be a difference between gross and net returns, there may be some
reason it was reported in that fashion (emphasis added).”79
In other words, the Merrill gross and net annual performances reported
from 1988 through 2001 were identical—there was no difference
indicated between the performance before and after fees. Since we
know that the Fund indeed paid investment management fees during
this 13-year period, either the gross or net figures (or possibly both)
must be wrong. Further, from 2002 through today, the difference
between gross and net performance has inexplicably ranged from as low
as 5 basis points to 55 basis points.
In conclusion, the performance of the Fund since 1988 is inaccurate, at
least in part—a fact which the Board should have easily detected.
2. Estimated Long Term Underperformance of $370 Million

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

2007. All returns prior to that time were received from the prior
investment consultant, Merrill Lynch.

As mentioned earlier, according to the current consultant on a net
basis—even based upon suspect long-term performance data provided
by the former consultant—the Fund’s US Equity; International Equity;
and Fixed Income actively managed assets, amounting to approximately
83 percent of the Fund’s total assets, have underperformed their
respective indices for virtually all 1, 3, 5 and 10-year periods. If long105
79

Email from Dan Holmes, September 9, 2015.

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

term performance is inflated (gross) then the actual (net) investment
performance may be worse.
We compared the net investment performance that we were provided
of the Fund from 1988 through 2014 against a 75 percent S&P 500 and
25 percent Barclays Aggregate index80 and concluded that the
performance of the Fund would have improved by approximately $370
million had the assets been invested in low cost, highly liquid, fully
transparent index funds.
In other words, a significant factor contributing to the underfunding of
the pension has been poor investment decision-making by the Board.
We note with great emphasis that due to the Board’s failure to diligently
scrutinize Fund performance, the performance history is so uncertain
that any analysis is inherently speculative.
We understand the City Council may subpoena from the Fund’s Master
Custodian, the relevant records since 1988, as well as verify and report
to stakeholders the true net performance.

106
80

Since the Merrill Lynch data apparently did not reflect a reduction for fees, we assumed fees of 75
basis points throughout the Merrill years. The actual fees may have been more or less.

 1400.00
1200.00

800.00
Jacksonville
600.00

75/25 Blend

400.00
200.00
0.00

40.00

Performance Comparison from 1988 to 2014
for Jacksonville fund compared to 75/25 S&P

30.00

20.00

10.00

Jacksonville Fund

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

1000.00

75/25 Blend
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

0.00

-10.00

-20.00

-30.00

107

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XVII. Gambling $106 Million on Energy Master Limited
Partnerships

108

Three years ago, the Fund invested approximately $106 million or 6.75
percent of its assets with two investment managers who are paid to
invest fund assets exclusively in Energy Master Limited Partnerships
(MLPs). These investments are subject to regulatory, interest rate, and
liability risk, and involve significant fees at the partnership level—in
addition to the 75 basis point fee the Fund pays to the investment
managers.
For example, investing in MLPs involves brokerage commission and
other front-end costs often totaling 20 percent or more. Also, the
general partner in an MLP often begins with a small stake of about 2
percent in the partnership, but is given incentive distributions from net
income after the quarterly required distributions. Since these
distributions are usually paid in the form of increased equity claims, the
general partner may attain an increased share of the partnership's
ownership.
In the past year, the Fund’s MLP investments have lost over 33 percent
in value and over a three-year period, they have significantly
underperformed (3.5 vs. 12.5 percent) the public equity market.
Note that 9 percent underperformance over 3 years amounts to $27
million in underperformance losses without compounding.
According to the Wall Street Journal, as the price of oil has fallen, these
investments have continued to plummet in value. The Alerian MLP
index fell 15.3 percent last month—the third-worst monthly loss in its
nearly 20-year history. The average MLP mutual fund, according to
Morningstar, lost 15.8 percent for the month.81
81

http://blogs.wsj.com/moneybeat/2015/10/09/why-falling-oil-prices-startled-mlp-investors/

 In our opinion, gambling on opaque, high-cost, high-risk MLP
investments is imprudent, especially for a severely underfunded
pension—regardless of the multi-million loss outcome.

The Master Custodian for the Fund currently is Northern Trust
Company.82 As Master Custodian, Northern holds and safeguards the
cash, securities and other property in the Fund and collects the income
and principal thereon.
The contract between the Board and Northern dated October 1, 2013,
stipulates that Northern shall follow the parameters set forth in Section
VIII, subsection A (excluding item #17) of the Statement of investment
Policy approved by the Board on June 16, 2009.
The Statement of investment Policy dated December 20, 2012 displayed
on the Fund’s website is presumably current. Why Northern’s contract
with the Board would be governed by certain provisions of a Statement
of Investment Policy that was replaced years ago is unclear.83
Unlike many of the contracts between the Fund and its investment
managers, the contract does not require Northern to maintain any
errors and omissions or other insurances. The contract does not include
a provision stating that Northern acknowledges it is a fiduciary with
respect to the assets of the Fund or an ERISA fiduciary. The Board does
not represent in the contract that the Fund is not subject to ERISA.

82

83

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XVIII. Custodian

It is our understanding that Northern has been the Fund’s Master Custodian for over a decade.

We were not provided with the Appendix to the contract relating to Section VIII, subsection A
(excluding item #17) of the Statement of investment Policy approved by the Board on June 16, 2009
or any pricing information.

109

 As mentioned earlier, certain of the practices permitted in the
agreement with Northern may be inconsistent with ERISA fiduciary
standards.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XIX. Commission Recapture
"Commission recapture" is a process whereby a pension plan receives a
rebate in connection with brokerage transactions incurred through the
plan’s investment managers. This rebate represents a portion of
commission (equity trade) or spread (fixed income trade) charged on
these investment transactions.84
The plan sponsor directs its investment managers to execute a portion
of their trades through a selected brokerage firm to the extent the
brokerage firm is competitive in price and trade execution. The
brokerage firm then rebates a portion of the commissions to the
pension plan. The pension plan can be rebated in cash or have the
brokerage firm pay certain administrative expenses of the pension plan.
Commission recapture programs involve responsibilities for plan
sponsors, administrators, and other fiduciaries created by ERISA's
fiduciary duties under Section 404 and prohibited transaction provisions
under Section 406.85
These legal responsibilities are the bases which require plan fiduciaries
to closely monitor plan expenses. Commission recapture programs are
funded through use of commission dollars. Soft dollars and commission
rebates generated by investment managers through trading activities
are plan assets, and both plan sponsors and investment managers have
84

110
85

http://www.dol.gov/ebsa/publications/softdolr.htm

Recall that the Fund, as a governmental plan, is not subject to ERISA but has specifically adopted in
its Statement of Investment Policy ERISA’s fiduciary standards.

 According to industry experts, there are three parts to directed
brokerage programs (such as commission recapture) -- the "good", the
"bad" and the "ugly". The "good" is directed brokerage can result in
significant savings to the pension plan. The savings can be used to offset
legitimate plan administrative expenses and, if done correctly, do not
interfere with investment managers' execution of trades. The "bad" is
when plan sponsors over-direct trades by utilizing a single brokerage
firm for more than a reasonable percentage, say 25 percent to 30
percent of overall trades. Another bad feature of directed brokerage
programs is, if not structured properly, they can interfere with
managers' execution of trades. In certain instances clients never receive
promised rebates or pay five to six times greater commission dollars
than the actual cost of services provided to the plan.
The "ugly" of directed brokerage programs is many arrangements are
done orally with very little written evidence. Therefore, it becomes very
difficult for plan sponsors to properly monitor the commission recapture
program.
“A cloud of suspicions has hung over soft dollars and their offspring-directed brokerage and commission recapture programs--for several
years.”87

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

fiduciary responsibilities regarding their prudent management and
oversight as they do with other plan assets.86

Worse still, commission recapture arrangements are opaque, indirect
payment schemes that may compromise transparency and

86

Id at 24.

87

http://www.plansponsor.com/MagazineArticle.aspx?id=6442461455

111

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

accountability, as well as present conflicts of interest for all fiduciaries
involved.88
For example, the Retirement Board of the City of Los Angeles Water and
Power Employees’ Retirement Plan terminated its commission recapture
program with ConvergEx89 in 2014 after the firm and two former
employees admitted to and settled charges against them that included
wire fraud and conspiracy to commit securities and wire fraud. The SEC
and U.S. Department of Justice determined that ConvergEx routinely
routed client orders through its offshore affiliate in Bermuda. This
unnecessary step was taken on transactions to secure additional fees by
adding a mark-up (an additional amount paid for the purchase of a
security) or a mark down (a reduction of the amount received for the
sale of a security) on the price of the security. The firm settled the
charges with the SEC and DOJ by agreeing to pay $107 million and $43.8
million, respectively, and admitting to wrongdoing.90
Plan sponsors who use recaptured funds for purposes other than the
best interest of the plan participants and beneficiaries may violate their
fiduciary duties.
Note that even the largest public pension in Florida has been scarred by
commission rebate schemes. In 1999, Barbara Jacobs, financial
coordinator with the Florida State Board of Administration, who had on
a number of public occasions championed the concept of soft dollars,
was discovered by the state's internal auditors to have embezzled more
88

Id.

89

Based upon a file folder received from the Fund Administrator, it appears that the Fund has used
ConvergEx for commission recapture in the past.

112

90

http://retirement.ladwp.com/AgendaItems/20140326%20-%20Item%2019%20%20Discussion%20of%20the%20Plan's%20Commission%20Recapture%20Program%20and%20Possibl
e%20Action.pdf

 According to a 1994 article, the Fund “started its commission recapture
program in 1987, when Keane's board approved a letter of direction
specifying that its money managers should place all their buy and sell
orders through Lynch Jones & Ryan, a New York-based brokerage firm.”
From 1987 to 1994, “Keane says the fund has saved more than $600,000
in commission costs. He uses one of the fund's recent investments to
illustrate the impact of those savings to his participants. "Our
commitment to this idea let us buy our headquarters building," Keane
says, "and to date, has paid for it more than twice over."”92
The article goes on to state that Keane “is firmly committed to the
brokerage policy he adopted in 1987."Barring better execution
elsewhere," Keane says, "this fund's policy is ABC-all brokerage
recaptured."”93
“Any commissions recaptured for ERISA clients must directly benefit plan
participants, and may not be used to reduce the expenses of the plan. In the case of
Jacksonville Police & Fire, the new headquarters building is an asset of the fund.
Roughly $225 million of the fund is in equities that have an average turnover of
about 20% per year, Keane says. More than 80% of its equity turnover goes through
commission recapture programs. In the year ended in September 1992, $149,000, or
some 80% of that year's total commissions paid, were recaptured, he adds. Savings
for the first eight months of fiscal 1993 were $108,000.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

than $400,000 in brokerage rebates meant to pay for manager research
and other investment services on behalf of the $120 billion Florida
SBA.91

91

http://www.plansponsor.com/MagazineArticle.aspx?id=6442461037
http://www.fraud-magazine.com/article.aspx?id=4294968469
92

93

http://www.plansponsor.com/MagazineArticle.aspx?id=6442462301

Keane touted the Fund’s ABC policy at numerous industry conferences throughout the 1990s. Note
that industry experts caution against over-directing trades more than 25-30%.

113

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

Firms like Goldman Sachs and Morgan Stanley have long contended that using soft
dollar brokers-and rebates-undermines the quality of execution. And even Stanley
Abel-chairman of brokers Abel Noser-who says his firm returned to Honeywell's
pension fund more than $5 million in less than five years through commission
recapture programs-wonders whether pension funds would be better off focusing
on cutting commissions than recapturing them.”

114

The above comment by Stanley Abel—the chairman of one of the
nation’s largest commission recapture firms, is important to note: A
simple, transparent alternative for plan sponsors seeking to reduce plan
trading costs is to simply cut or cap commissions, as opposed to
recapturing them. The direct-cutting approach promotes accountability
and eliminates the risk that commissions opaquely recaptured may be
used for illegitimate purposes.
The article concludes:
“Like so much else in investment services, the battle over commission recapture
boils down to marketing. Jacksonville Police & Fire clearly are convinced by what
they have heard and seen; by contrast, AMR Investment Services, the pension arm
of American Airlines, will not go near soft dollar or commission recapture
programs.”

Today the Fund appears to have backed-away from the aggressive ABCall brokerage captured policy stated by Mr. Keane in the 1994 article
above. The Statement of Investment Policy of the Fund states:
“The Fund has entered into commission recapture arrangements with several
different brokers so as to provide a range of choices to investment advisors in their
efforts and responsibilities to seek best execution. The Fund will make the listing of
commission recapture brokers known to the various investment advisors; however,
the Fund will not stipulate or dictate the level of commission dollars to be processed
through the Fund's commission recapture arrangements. The level of commission
dollars to be recaptured is solely based upon the judgment of the investment
advisor.”

 Each of the Fund’s investment managers is also responsible for providing
the Fund with a quarterly update on its investment activities as well as
appropriate commentary, including but not limited to a discussion of
commission recapture activities. Also, domestic equity commissions are
essentially capped at three cents per share for large capitalization
portfolios and four cents per share for small-mid capitalization
portfolios.
Finally, the Statement of Investment Policy states:
The Commission Recapture Program established by the Fund, shall be limited to cash
rebates made payable to the Fund and/or the Fund's Custodian Bank and fully
reported as commission recapture revenues within the Fund's financial reporting
system. Commission Recapture distributions shall not be accepted by the Fund in
the form of payments on behalf of the Fund for goods and services to third parties
or for services provided by the broker.95

94

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The contracts between the Board and the Fund’s investment managers
state that the manager “acknowledges it has been provided with and
understands the provisions of the commission recapture program duly
adopted by the Board together with a list of recapture agents. Subject to
its continuing duty to secure best execution on behalf of the Fund, the
manager agrees to utilize the recapture agents in all transactions where
it is reasonable to do so.”94

See page 3, DePrince, Race & Zollo agreement.

95

Note: According to the Government Finance Officers Association, “The plan should receive all
recaptured commissions in hard dollars (as opposed to soft dollars, a directed brokerage practice in
which the rebate is received in the form of services such as research), which can be used to reduce
overall administrative expense. An alternative to the recapture of commissions is for plans or their
investment managers to negotiate a lower transaction fee directly with participating brokerage
firms.” http://www.gfoa.org/commission-recapture-programs

115

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

We requested annual statements of commissions recaptured by the
pension since 1987, as well as documents related to the expenditure of
the recaptured amounts.96
Instead we were provided with statements indicating commissions
recaptured since 2005 (not since 1987, as requested) by Merrill Lynch;
Ticonderoga Securities; Reynders & Gray; National Financial Services;
Magna Securities; Lynch, Jones & Ryan; Knight Capital; Donaldson; and
Capital Institutional Services in the amount of $1.936 million.
Assuming the Fund has recaptured approximately $200,000 per year
since 1987, approximately $5.7 million in commissions may have been
recaptured.
In response to our question regarding how the commissions recaptured
were spent, we were simply told, “The funds were deposited into our
General Account.”
As noted above, the Fund Administrator himself has mentioned in
speeches that recaptured commissions were used to buy a new
headquarters building.97
We also asked the Fund Administrator how the Fund accounts for
commission recapture rebates:
If cash is received directly by the fund, is the cash recorded as an adjustment to
realized and unrealized gain loss depending on whether or not the security that the
commission relates to has been sold? Where do the commissions recaptured appear
in the financials?

The Fund Administrator responded:
116

96

97

Email to Greive July 23, 2015.

It is our understanding that the Fund’s office building has been named after the Fund
Administrator.

 Deposited into JXSF621PF, sub object 369920 – Rebate of Commissions.

Note that actively managed accounts with higher portfolio turnover
generate greater commission rebates. The Board’s emphasis on
recapturing commissions may have led to excessive reliance upon active
management, contributing to the Fund’s overall underperformance.
We understand that the City Council may subpoena records related to
the receipt and use of rebated commission dollars since 1987.
XX.

Decades of Conflicted Consultant Advice

As noted in the Report of the Retirement Reform Task Force,98 the Board
utilizes the services of an investment consultant who advises the Board
on investment policies and decisions, and who assists in implementing
those decisions. The investment consultant’s duties and responsibilities
are enunciated in the contract between the Board and the investment
consultant and the Fund’s Statement of Investment Policy.
The Board does not utilize an investment committee as does the Florida
Retirement System. According to the Report, Task Force members
indicated that they had experience with other organizations which used
investment committees in addition to investment consultants, and that
they believed that the use of an investment committee is a “best
practice.” It was the opinion of the Task Force that a volunteer
investment committee consisting of knowledgeable investment and
financial professionals would be helpful to assuring sound financial and
investment decisions by the Board.
98

Page 19.

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In our opinion, stakeholders should be provided with a full accounting of
all rebated dollars in order to determine whether they have, consistent
with heightened ERISA fiduciary standards, been used for the exclusive
benefit of the participants.

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1. History of Regulatory Concerns Regarding Pension Investment
Consultant Conflicts
“Pension consultants” provide advice to pension plans and their trustees
with respect to such matters as: (1) identifying investment objectives
and restrictions; (2) allocating plan assets to various objectives; (3)
selecting money managers to manage plan assets in ways designed to
achieve objectives; (4) selecting mutual funds that plan participants can
choose as their funding vehicles; (5) monitoring performance of money
managers and mutual funds and making recommendations for changes;
and (6) selecting other service providers, such as custodians,
administrators and broker-dealers.
Many pension plans rely heavily on the expertise and guidance of their
pension consultant in helping them to manage pension plan assets.
Public pensions, in particular, rely heavily on their pension consultants
since these funds generally have lay Boards that lack investment
expertise.
In late 2003, the staff of the Securities and Exchange Commission
(“SEC”) announced an inquiry into conflicts of interest involving
investment consultants to pensions, including allegations of “pay to
play” practices.
“Pay to play” in the pension context refers to the common practice of
investment consultants who are retained to provide objective advice
regarding investment managers, requiring or encouraging managers to
direct or “pay” trading commissions and/or other compensation to them
in order to be recommended to pension clients.
118

When consultants recommend managers based upon their willingness
to pay compensation to the consultant, as opposed to on the
investment merits, they engage in self-dealing and breach their fiduciary

 On May 16, 2005 the staff of the SEC’s Office of Compliance Inspections
and Examinations issued a report which, in part, concluded that conflicts
of interest were pervasive and disclosure practices lacking in the
investment consulting industry.99
On June 1, 2005 the SEC and Department of Labor issued a publication
entitled “Guidance Addressing Potential Conflicts of Interest Involving
Pension Consultants.” To encourage the disclosure and review of more
and better information about potential conflicts of interest, the
Department of Labor and the SEC took the unusual step of developing
and issuing a set of questions to assist plan fiduciaries in evaluating the
objectivity of the recommendations provided, or to be provided, by a
pension consultant. That is, a form of questionnaire was provided for
plan sponsors to use in their dealings with their consultants and for
consultants to make available.100
As the DOL noted at that time:

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duty to place client interests ahead of their own and. Substantial harm
in the form of excessive risk and fees, as well as diminished investment
returns has been found to result. The SEC staff examined the divergent
sources of consultant compensation and the related conflicts; whether
such amounts were properly disclosed; and whether pensions were
being harmed by such practices.

“Findings included in a report by the staff of the U.S. Securities and Exchange
Commission released in May 2005 …, raise serious questions concerning whether
some pension consultants are fully disclosing potential conflicts of interest that may
affect the objectivity of the advice they are providing to their pension plan clients…
99

Staff Report Concerning Examinations Of Select Pension Consultants May 16, 2005, The Office of
Compliance Inspections and Examinations, U.S. Securities and Exchange Commission.
100

Selecting and Monitoring Pension Consultants, Tips for Plan Fiduciaries, U.S. Department of Labor,
May 2005.

119

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

SEC staff examined the practices of advisers that provide pension consulting services
to plan sponsors and trustees. These consulting services included assisting in
determining the plan’s investment objectives and restrictions, allocating plan assets,
selecting money managers, choosing mutual fund options, tracking investment
performance, and selecting other service providers. Many of the consultants also
offered, directly or through an affiliate or subsidiary, products and services to money
managers. Additionally, many of the consultants also offered, directly or through an
affiliate or subsidiary, brokerage and money management services, often marketed
to plans as a package of “bundled” services. The SEC examination staff concluded in
its report that the business alliances among pension consultants and money
managers can give rise to serious potential conflicts of interest under the Advisers
Act that need to be monitored and disclosed to plan fiduciaries.”

Most significantly, conflicts of interest at investment consulting firms
were found to result in substantial financial harm to plans by the
Government Accountability Office in a 2007 report.101
In its report, the GAO took the extraordinary step of quantifying the
harm a conflicted adviser to a plan can cause. "Defined Benefit plans
using these 13 consultants (with undisclosed conflicts of interest) had
annual returns generally 1.3% lower ... in 2006, these 13 consultants
had over $4.5 trillion in U.S. assets under advisement," the report
stated.
Failure to disclose conflicted sources of compensation and the amounts
of such compensation among these trusted advisers to sponsors of
retirement plans, as well as the potential economic harm to pensions
resulting from such conflicted advice, has been well documented by the
SEC, DOL and GAO.

120
101

Defined Benefit Pensions: Conflicts of Interest Involving High Risk or Terminated Plans Pose
Enforcement Challenges, GAO, June 28, 2007

 In summary, awareness of conflicts of interest involving pension
consultants has grown and for over a decade plan sponsors have
acknowledged a duty to investigate such conflicts.

As mentioned earlier, the SEC staff in 2005 found that many investment
consultants offer, directly or through an affiliate or subsidiary, products
and services to money managers that can give rise to serious potential
conflicts of interest under the Advisers Act that need to be monitored
and disclosed to plan fiduciaries.102 The most common and controversial
investment consultant conflict scenario relates to “broker-affiliated”
consultants.
That is, securities brokerages that serve as pension gatekeepers may
offer either directly or through their subsidiaries and affiliates securities
trading and other services to the very money managers they
recommend to pension clients. The commissions and other
compensation broker-affiliated consultants earn from managers may be
significantly greater than the compensation received for providing
pensions with supposedly objective advice regarding these managers.
There is a risk that these payments from managers to consultants may
not only undermine the integrity of the advice consultants provide to
pensions but also result in underperformance if assets are allocated to
investment managers based upon willingness to pay, as opposed to
investment merit. Further, payments from money managers to
investment consultants can result in excessive consulting, brokerage and
investment management fees.

102

Staff Report Concerning Examinations Of Select Pension Consultants May 16, 2005, The Office of
Compliance Inspections and Examinations, U.S. Securities and Exchange Commission.

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2. Broker-Affiliated Pension Consultants

121

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

122

For example, in March 31, 2000, a KPMG Performance and Operational
Review of the Metropolitan Government of Nashville and Davidson
County’s pension investments determined that the PaineWebber
investment consulting contracted fee was excessive. The fee the $1.3
billion pension was contractually obligated to pay for consulting services
was $788,747, as opposed to an average fee for similar public funds
which ranged from $92,000 to $163,000. However, PaineWebber
actually earned a total of $1,408,773 in commissions for the year.
Similarly, investment manager fees were higher than fees paid by other
similar public funds.
Benchmark’s subsequent investigation of the PaineWebber
compensation scheme on behalf of the Nashville pension revealed
significant additional fiduciary breaches, compensation and excessive
fees.
We subsequently investigated this same investment consultant after he
left PaineWebber and joined Morgan Stanley on behalf of the City of
Chattanooga pension fund.
In June 2005 the Atlanta District Office of the SEC concluded an
examination of the Nashville Branch Office of Morgan Stanley. The SEC
review of the pension consulting arrangement between Morgan Stanley
and the City of Chattanooga public pension fund revealed that Morgan
Stanley failed to fully and fairly disclose all material facts concerning its
conflicts of interest, including its compensation agreements in violation
of Section 206 of the Investment Advisers Act of 1940.
The SEC concluded that the disclosures made by Morgan Stanley were
not sufficiently detailed in order to allow its client to evaluate
investment manager recommendations and to give its informed consent
to Morgan Stanley’s conflicts of interest. Further, determined that
Morgan Stanley had failed to disclose to the pension the conflicts of

 On July 20, 2009, the SEC instituted public administrative and cease-anddesist proceedings against the pension consultant, who, according to
the SEC, was a member of Morgan Stanley’s Chairman’s Club, comprised
of the firm’s top 175 financial advisers, and ranked among the firm’s top
25 financial advisers in revenue.103
PaineWebber and Morgan Stanley both entered into settlements with
the public pension funds of the cities of Nashville ($10 million) and
Chattanooga ($6 million) in matters involving pension consultant
conflicts of interest and pay-to-play.104
Callan Associates, another pension consulting firm, entered into a $4.5
million settlement with the City of San Diego regarding consultant
conflicts. In addition, the SEC investigated and took action with respect
to Callan Associates, CSG, and Merrill Lynch regarding pension
consulting conflicts. Callan and Yanni Partners, were sanctioned by the
SEC.105
3. 20 Years of Conflicted Advice Cost Fund $300-$500 Million
For almost twenty years, from 1988 through December 31, 2007, Merrill
Lynch, a broker-affiliated investment consultant, served as the
investment consultant to the Board. If, as the GAO study found, pension
consultant conflicts cost plans 1.3 percent, then over a 20-year period,
103

https://www.sec.gov/litigation/admin/2010/34-61278.pdf

104

Morgan Stanley Settles Chattanooga Suit, fundfire.com, March 24, 2006.

105

Adviser Firm on Pensions Is Rebuked, by Mary Williams Walsh, The New York Times, September
21, 2007.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

interest related to the firm’s financial adviser (broker) compensation
program, including indirect “perks.”

123

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with compounding, such conflicts may have cost the Fund almost 30
percent of its value—perhaps $300-$500 million.
Merrill Lynch provided Consulting Services to the Board through its
“Callaway Team,” a group headed by Merrill Lynch Financial Advisors
Michael and Mellissa Callaway, and whose employees all operated out
of the same Merrill Lynch office in Duval County, Florida.
In its capacity as investment consultant to the Board, Merrill Lynch
provided a package of services intended to assist the Board in among
other things, (i) developing the Fund’s investment policies and asset
allocation strategies, (ii) selecting the Fund’s’ investment managers, and
(iii) monitoring and analyzing of the performance of the Fund’s
investments.
The contracts between the Board and Merrill stated that the
information needed to provide investment evaluations were generally
contained in the records and reports of the custodian bank and that
Merrill was entitled to reasonably rely upon such information.
In its contracts with the Board,106 Merrill certified that it was
“professionally qualified as an independent consultant to evaluate the
performance of the professional money managers investing the assets
of the Fund.”
Under Florida Statutes Chapter 185 applicable to Municipal Police
Pensions, a professionally qualified independent consultant must, at a
minimum, provide services on a flat-fee basis and not be associated in
any manner with the money managers for the pension fund.107
106

124
107

We have only reviewed those contracts provided by the Fund Administrator.

185.06 (5) (b). As detailed below, Merrill was not paid on a flat-fee basis and was associated, via
brokerage arrangements, with money managers for the pension.

 However, the initial contract (1988) stated that the Board could pay the
fee in directed commissions for which the cost would be approximately
twice the hard-dollar fee.
Beginning in 2004 and through 2006, the contracts provided that in
addition to any hard-dollar fee, “the Board, in recognition of the
increased level of services provided by the Consultant to the Board,
authorizes additional compensation for the Consultant in the form of a
rebate of 5 percent of the revenue received by Broadcort Capital (an
affiliate of Merrill) from the Fund’s commission recapture account.”
Apparently throughout the consulting relationship Merrill Lynch’s
trading desk was receiving trading commissions from investment
managers that Merrill Lynch Consulting Services recommended to the
Fund, in addition to the hard dollar annual fee.
Fund General Counsel in a 2005 article stated trades by the Fund’s
managers with Merrill’s brokerage arm were “separate” and “never
make their way back to the consulting arm.”
“Merrill Lynch's consulting arm, however, is separate from its brokerage arm, so
conflicts are less inherent, says Robert D Klausner, a partner in the Plantation,
Florida, law firm of Klausner & Kaufman, PA, who has looked into Merrill Lynch on
behalf of a client pension fund in Florida. Klausner, who also is general- counsel for
the National Conference on Public Employee Retirement Systems (NCPERS), admits
that some trades of consulting clients are executed by Merrill Lynch. It would be
hard to not do so since it is one of the biggest brokerage houses in the country,108 he
108

In a 2003 email from Board member Jaffe to the Fund Administrator, Jaffe observes that ”If Merrill
is the “biggest” (trading firm) in the industry and we are hurting ourselves to eliminate the (trading)
services, then it would say that maybe we shouldn’t use Merrill as our consultant.”

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The contracts between the Board and Merrill generally provided that
the firm would be paid an annual hard-dollar fee, e.g. $68,200 in 2000
and $91,395.00 for 2008, for its services.

125

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adds, and, even if trades are made through Merrill Lynch's brokerage arm, those
fees never make their way back to the consulting arm.

126

In interviewing consultants, the first question boards should ask is how the
consultant will make his money. All fees should be disclosed, particularly with
brokerage-based consultants, says Klausner. "The biggest issue is a failure to
disclose," says Klausner. "If it's disclosed, then the trustees can decide if the
business model works or if there is an appearance of impropriety."109

As discussed extensively below, by the year 2000, concerns regarding
the integrity of Merrill Lynch’s pension consulting advice and related
conflicts of interest were widely known. In 2003, Board members and
Fund General Counsel were questioning Merrill regarding conflicts and
business practices. In 2005, the Board was made aware in published
reports of the SEC staff investigation into certain specific business
practices of Merrill and subsequently Merrill informed the Fund that it
was under investigation by the SEC for alleged violation of federal
securities laws. In early 2006, the SEC contacted the Fund requesting
voluntary cooperation in an investigation of Merrill and by late 2007 an
SEC enforcement action against Merrill appeared imminent.
These issues resulted in the Board finally terminating its relationship
with Merrill at the beginning of 2008.
On November 5, 2007, Fund General Counsel sent a letter to the Board
stating:
“Nearly two years ago, Merrill informed the Fund that it was under investigation by
the SEC for alleged violation of federal securities laws, but only after public
disclosure of the investigation, rather than as required under our contract. SEC
investigators have questioned trustees and administrators from a number of Florida
clients of Merrill, including staff of the Fund. The initial allegations against Merrill
involved whether Merrill had received undisclosed compensation and related
109

http://www.plansponsor.com/MagazineArticle.aspx?Id=4294991588

 conduct. The charges referred to in Merrill’s letter to the Board have not been
released and at this juncture, it is not useful to speculate on unknown details.

Merrill was invited to attend the November 5 meeting of the Board and initially
agreed. It has now refused to attend. Instead Merrill is requesting a list of questions
which it may or may not choose to answer. This is an inadequate response from a
fiduciary to the Fund, particularly when serious concerns about alleged federal
securities laws violations are present. In our view, Merrill’s refusal to attend the
November 5 meeting is a breach of its fiduciary duty.’

Fund General Counsel recommended terminating the agreement with
Merrill effective December 31, 2007, as well as tasking the new
consultant with an in depth review of Merrill’s reports and practices to
determine if any previously undisclosed concerns were present and
authorizing discussion with the Fund’s securities counsel to determine if
the Fund had suffered a recoverable loss.111
On that same day, the Fund finally terminated its two-decade
relationship with Merrill effective December 31, 2007. At that time, the
Fund issued a public Statement stating the Fund,
“… retained Merrill Lynch Consulting Services (MLCS) to provide independent
fiduciary guidance to the Board on issues relating to Investment Manager
Performance Measurement; review of and updating the Fund Asset Allocation Plan;
Fund Investment Policy and other related invested related monitoring services
needed by the Board. For over 20 years MLCS provided the required services to the
Board…

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…there were related issues discovered and investigated directly by the Fund and this
office and brought to Merrill's attention. That investigation and follow up, which was
previously reported to the Board, resulted in restitution to the Fund…110

110

A $10,000.00 transition management credit was provided by Merrill to the Fund on March 31,
2004.
111

We requested from the Fund Administrator any documents related to any in depth review
undertaken by the consultant or others of the Merrill relationship. According to a September 2, 2015
email from the consultant who replaced Merrill, the new consultant did no such evaluation or review.

127

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Nearly 2 years ago, the Board was made aware in published reports of the SEC staff
investigation into certain specific business practices of MLCS and also those of Mr.
Michael Callaway (the Consultant), a representative of MLCS who has a fiduciary
relationship with the Board as the Investment Consultant Performance
Measurement Consultant to the Board. The staff of the Board has cooperated fully
with the SEC staff during the investigation.
On October 29, 2007 the Board was informed by MLCS “the SEC staff has indicated
that it believe that some practices engaged in by Merrill Lynch and Mike Callaway
violate certain regulatory prohibitions.” Also, … we were informed by the Consultant
the SEC “has taken issue with some of Merrill Lynch’s and my practices.” The Board
has no detailed knowledge of the particular practices the SEC staff believes to violate
regulatory prohibitions, nor does the Board by its actions today express a view of the
SEC staff recommendations.”

4. Repeated Warnings Regarding Merrill Lynch Consulting in Florida
In early 1996, questions surrounding conflicts related to pension
consultants with affiliated brokerages began to attract national
attention.112
By 2000, the dangers related to broker-affiliated consultants were being
discussed with Florida public pensions and their attorneys. Independent
conflict-free consultants were challenging broker-affiliated consultants
that had long dominated the Florida public pension marketplace by
drawing attention to the conflicts and dangers related to brokeraffiliated consultants.113
In 2002, Edward Siedle was invited to give a speech specifically focused
upon pension consultant conflicts at the annual Florida Police and
Firefighters Pension Trustee Educational Seminar hosted by The Florida
112

128
113

http://www.benchmarkalert.com/article7.html

Florida-based Independent consultant The Bogdahn Group voiced concerns in 2002 regarding
broker-affiliated consultant conflicts and later wrote an extensive White Paper which was distributed
to members of the Florida Public Pension Trustees Association in 2004.

 Siedle explained the breach of fiduciary duty that results when a pension
gatekeeper, the investment consultant, receives brokerage
compensation from the managers it recommends, provided details
regarding the first-ever investigation of broker-consultant conflicts for a
public pension in Nashville that resulted in a $10 million recovery for the
single public pension, and warned attendees of the potential damages
to plans.
Around this time, he met with and discussed conflicts of interest
involving Merrill Lynch specifically with the Fund Administrator, General
Counsel and attorneys from BLBG accompanying the Fund
Administrator. In light of the potential harm to the Fund and other
Florida public pensions, he urged them to take immediate action.
In December, 2004, The New York Times wrote an article, How
Consultants Can Retire on Your Pension, which mentioned that the
potential for conflicts was greatest at firms with brokerage or trading
operations. It was also stated that Merrill Lynch Consulting Services in
Jacksonville had almost 100 pension funds in Florida as its clients but
that some Florida funds had already fired the firm and replaced it with
an independent consultant.

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Department of Management Services’ Division of Retirement Security in
Tallahassee.

Next securities regulators from the State of Florida asked to meet with
Benchmark at our offices and reviewed files regarding the brokeraffiliated consultant abuses we had uncovered.
In September 2005 Money Management Letter wrote an article about
how Florida regulators were looking into brokers serving as consultants
to public pensions.

129

 Forensic Investigation of the Jacksonville Police and Fire Pension Fund

December 2, 2005, The New York Times ran an article entitled, “Merrill
Unit Subpoenaed on Pensions.” It was now widely known that the SEC
was investigating Merrill’s pension consulting operation in Florida.

130

The Wall Street Journal reported on March 12, 2007 that Merrill had
begun issuing refunds to public pension clients in Florida. Apparently
some Florida public pensions took the money, no questions asked—i.e.,
no investigation as to whether the damages may have exceeded the
compensation offered.
On Sunday, November 4, 2007, the New York Times ran an article
regarding the SEC investigation of Merrill and the letters the firm had
sent to clients.
On May 2008, Merrill announced it was closing down its Florida pension
advisory practice.
In January, 2009, the SEC finally took action against Merrill and Michael
Callaway. Merrill Lynch agreed to settle the SEC’s charges and pay a $1
million penalty.
The SEC stated that investment advisers, such as Merrill Lynch, owe
fiduciary duties to their clients and, therefore, must, among other
things, disclose all actual or potential conflicts of interest. In addition,
investment professionals who advise pension funds must be aware of
the important role that pension plans play in the financial security of the
beneficiaries.
“During the relevant time period, Merrill Lynch charged for the advisory services
provided through Merrill Lynch Consulting Services on a fixed-fee basis. Clients could
pay in cash (referred to as “hard dollars”) or through “directed brokerage.” Directed
brokerage was an arrangement whereby the clients directed their money managers
to execute trades through Merrill Lynch’s institutional trading desk, consistent with
the managers’ best execution obligations. In return, in addition to execution
services, these clients received credit for a portion of the commissions generated by

 Under Merrill Lynch’s standard directed brokerage relationship, Merrill Lynch
Consulting Services and, consequently, its investment adviser representatives
potentially could receive and, in fact, often did receive significantly more revenues
through directed brokerage commissions than they would have received if clients
had paid brokerage commissions for trade executions elsewhere and paid Merrill
Lynch only the hard-dollar annual Consulting Services fee. For example, in one
instance in the Ponte Vedra South office a client who was obligated to pay a $7500
annual hard dollar fee for the advisory services it received through Merrill Lynch
Consulting Services generated almost $175,000 in production credits by executing
trades at Merrill Lynch.”114

5. Florida Public Pension Class Action Settlement with Merrill Lynch
On July 15, 2010, 76 Florida local public pensions filed a detailed
putative class action complaint against Merrill Lynch.115 The Plaintiffs
alleged that Merrill Lynch breached its fiduciary duties to the plans by,
among other things, (a) entering into fee arrangements with the plans –
and with certain third parties (such as mutual fund companies) who
provided services to the plans – that placed Merrill Lynch’s financial
interests ahead of the plans’ interests and that compromised Merrill
Lynch’s role as an “independent” advisor to the plans, selecting money
managers from a “short list” of money managers that Merrill Lynch’s
Callaway Team created and maintained in its Florida office. Plaintiffs
further alleged in the complaint that the plans suffered damages as a
result of Merrill Lynch’s breaches of its fiduciary duties, and demanded

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these trades against the hard dollar fee owed for the advisory services provided by
Merrill Lynch Consulting Services. Even after the hard dollar fee had been satisfied,
Merrill Lynch Consulting Services, and its investment adviser representatives,
continued to receive a portion of the commissions generated through the directed
brokerage relationship.

131
114

https://www.sec.gov/litigation/admin/2009/ia-2834.pdf

115

Both the City’s General Employees’ Pension and the Fund were plaintiffs in the suit.

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that Merrill Lynch disgorge all benefits, compensation, or other value it
received, from any source, in connection with the provision of
Consulting Services to the Plans or the investment of the plans’ assets.

132

On March 23, 2012, the parties entered into a Stipulation and
Settlement Agreement resolving the matter for $8.5 million. Attorneys
for the plaintiffs including BLBG and the General Counsel’s firm, shared
in $2.125 million in legal fees.
In response to our request for information, we were provided with a
check dated February 28, 2013 made out to the Fund in the amount of
$273,696.64 and a letter indicating that the check represented the
Fund’s pro rata share of the net settlement fund from the class action
case brought against Merrill Lynch. It appears that, aside from a
transaction management credit of $10,000, this is the total
compensation the Fund received in damages from Merrill Lynch.
Since, based upon the GAO study, pension consultant conflicts may have
cost the Fund almost 30 percent we requested any evaluation or review
of the damage caused to the Fund by Merrill over the decades.
The Fund Administrator provided no such analysis and the new
consultant indicated it undertook no such review.
In our opinion, the Board failed to heed credible warnings and
adequately investigate conflicts of interest related to the Fund’s
consultant for years. Based upon the documents we were provided, it
appears the Board did not question the receipt of compensation by the
General Counsel’s firm—an obvious potential conflict of interest noted
in The New York Times—from the consultant during the period. Even
after terminating Merrill, the Board failed to conduct or commission any
review of the potential (massive) harm to the Fund caused by Merrill.
The Board did not investigate the fact that the gross and net investment

 performance of the Fund as reported by Merrill were inexplicably the
same for many years.

At least since the termination of Merrill Lynch, the investment
consultant to the Board has been Summit Strategies Group. The current
Statement of Investment Policy of the Fund116 enumerates the specific
duties of the Investment Consultant, as well as includes the most
elaborate discussion of the fiduciary obligations applicable to any Fund
service provider.
The Statement of Investment Policy with respect to the Consultant
states:
“The Consultant is acknowledged to be a fiduciary, as it relates to its services and
advice provided to the Fund. In discharging its contractual responsibilities, the
Consultant recognizes that its fundamental obligations are to the Board and the
members of the Fund, and that it will place the interests of the Board and the
members of the Fund above all others. Consistent with this focus, the Consultant will
not enter into any agreement or take any action contrary to its fundamental
responsibilities and obligations. One of the fundamental roles of the Consultant is to
provide an independent, unbiased perspective on the Fund's goals, structure,
policies, performance and managers. In preserving and maintaining this independent
advisory role, the Consultant shall ensure that through words, deeds, and financial
relationships, it is insulated from conflicts of interest. In this regard, the Consultant
has an affirmative duty of full and fair disclosure of all material facts to the Fund
regarding all issues and relationships that relate to the subject of independence and
conflict of interest. The Consultant additionally maintains an obligation to the Board
to disclose all forms of pertinent information on Investment Managers employed by
the Board, various sources of the Consultant's compensation, and other aspects of
the Fund's investment program that a reasonable person in like posture would deem
pertinent to the Board's area of interest and concerns. In an effort to avoid any
appearance of conflicts of interest and to maintain the highest degree of objectivity
116

We have only reviewed the current Statement of Investment Policy of the Fund.

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XXI. Current Consultant - Summit Strategies

133

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and independence, the brokerage affiliate(s) of the Investment Consultant shall not
be eligible to participate in the Fund's Transition Management Programs authorized
from time to time by the Trustees.

134

Unless otherwise approved on an exception basis and fully disclosed to the Board in
advance, investment managers shall not: custody assets under their control, execute
trades through brokers affiliated with the Investment Manager or the Fund's
Investment Consultant or Custodian Bank, or otherwise pay any fees, compensation
or gratuities to the Fund's Investment Consultant or Custodian.”117

The 2013 contract between Summit and the Board states that the
consultant originally commenced providing services to the Board on
December 3, 2007.
While the list of duties or obligations required of the Consultant in the
contract and Statement of Investment Policy is extensive, conspicuously
absent is any specific obligation to advise and assist the Board in
negotiating and evaluating the investment advisory fees the Fund pays.
The Board’s contract with Summit provides that information needed to
provide the investment evaluations required of the Fund and its
investment managers is generally contained in the records and reports
of the custodian bank and that the consultant is entitled to reasonably
rely upon such information.
While the custodian bank could provide such performance information,
the Board under Merrill Lynch and now under Summit, continues to rely
upon the consultant for performance analyses.118 As mentioned earlier,
Summit has represented that it did not undertake any evaluation or
review of Merrill Lynch.

117

118

Page 38.

It is our understanding that the General Employees’ Fund relies upon its custodian for investment
performance data.

 A review of the firm’s Form ADV filing with the SEC indicates that the
firm has no affiliated broker-dealer or any other financial industry
affiliation. While the firm does manage private investment funds which
represents a potential conflict of interest, the Fund has not invested in
any such Summit fund.
We recommend the contract between the Fund and its Master
Custodian be amended to include calculating investment performance
and that the Fund rely upon any investment consultant only for advice
and analysis of such verified investment performance. We also
recommend that the contract between the Fund and any investment
consultant be amended to include a duty to advise the Board on the
reasonableness of the investment advisory fees the Fund pays.
XXII. Plaintiff Class Action Law Firms
The Fund has entered into agreements with multiple securities class
action law firms to monitor its investment portfolio in order to
determine whether the Fund has suffered any loss due to violations of
federal and/or state securities laws, calculate losses, identify breaches
of fiduciary duty and other corporate misconduct.119

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

The contract provides for a hard dollar quarterly fee of $61,466.00 or an
annual fee of approximately $246,000. Recall that the highest annual
hard dollar fee paid to Merrill Lynch was substantially less—
approximately $90,000.

It appears that the General Counsel of the Fund recommends which
class action law firms should be used for monitoring.120
119

According to the Board Workshop Minutes dated November 19, 2013, the Fund recovers about

$500,000 a year in securities litigation proceeds. These cases are all done on a contingency basis.
120

See November 18, 2008 memo re: securities monitoring services from Bob Klausner, General
Counsel to the Board.

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As mentioned above, the Board has delegated to the General Counsel
and Fund Administrator the duty to review whether the Fund should
proceed as lead plaintiff in any class action litigation and the General
Counsel may receive compensation related to any such cases brought by
the firms he has recommended to monitor the Fund’s portfolio (or any
other class action law firm).
As explained by Forbes:
“Bernstein Litowitz, like other firms in the class action field, offers free “portfolio
monitoring” to pension-fund clients, tapping into their portfolios electronically and
alerting them to potential lawsuits.
One lawyer who works for pension funds in Florida receives e-mails every week from
big class action firms prowling for clients, with queries sometimes arriving within
minutes of each other after new cases are filed. Florida lawyers get their cut: up to
18%, he says. Such fees are typically described as compensation for work as local
liaison rather than purely for referring a client, which violates legal ethics in most
states.”121

Some have severely criticized these “portfolio monitoring”
arrangements between pensions and class action firms. One highly
regarded federal judge, Judge Rakoff, noted in 2009, that such an
arrangement was “about as obvious an instance of conflict of interest as
I’ve ever encountered in my life.” He said he was shocked that persons
with a fiduciary duty to monitor pension investments would choose “to
save a few bucks” by hiring a law firm to monitor those investments that
could only profit by recommending litigation.122
In response to plaintiffs’ counsel’s suggestion that his law firm analyzed
and evaluated the merits of the case before recommending that the
121

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122

http://www.forbes.com/forbes/2004/0920/150.htm

http://www.dandodiary.com/2009/04/articles/securities-litigation/judge-calls-plaintiffs-firmsmonitoring-services-shocking-conflict-of-interest/

 For years we have urged public pension officials to scrutinize the
arrangements they enter into with class action law firms, just as they vet
investment consultants, money managers, brokers and anyone else
doing business with their funds. Nevertheless, scrutiny of lawyers by
public pensions remains severely limited–and not just among pension
officials.
For example, in 2009 New York Attorney General Andrew Cuomo who
was investigating investment consultants for bribing their way into
doing business with the state’s giant pension fund, stated that he would
not subject class action law firms (from which he reportedly received
large campaign contributions) to similar scrutiny for similar behavior.
We were provided with and reviewed portfolio monitoring agreements
between the Fund and Bernstein Liebhard; Cohen Milstein; Berman
DeValerio; and Spector Roseman.
While the Fund General Counsel in an email124 referred to BLBG as the
Fund’s “primary securities litigation council” and in a 2004 letter to the
Board stated that the Board entered into an agreement with BLBG to
monitor the Fund’s portfolio, no contract or agreement with the firm
was provided to us.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

fund become involved in litigation, Judge Rakoff said that arrangement
"makes crystal clear that the Iron Workers (the pension involved) are
being led by counsel rather than the other way around (emphasis
added)."123

The relationship between BLBG, the Fund and the Fund Administrator is
longstanding and widely known.
123

Id.

124

September 25, 2010 email from Klausner to Keane.

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 “At the Jacksonville [Fla.] Police & Fire Pension Fund, a Bernstein Litowitz client,

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suing big business for fraud seemed a fitting step. “Every day our members put
people in jail for auto theft and armed robbery. It was logical to leap from enforcing
local laws to going after boardroom bandits,” says John Keane, a former cop who is
the administrator of the $900 million fund.
The Jacksonville fund is the lead plaintiff in a class action accusing Nextcard of
underreporting loan losses; it also leads a case pending against El Paso Corp. Keane
has parlayed this into regular speaking gigs, traveling to Bernstein Litowitz investor
forums that also have featured Carl McCall, the ex-comptroller for New York, and
New York Attorney General Eliot Spitzer, Wall Street slayer.”125

The Fund Administrator noted in his response to our request for all
contracts and monitoring agreements between the Fund and class
action litigation firms that “all law firms are not under this type of
contract.”
Accordingly, on September 4, 2015 we specifically asked for any type or
contract between the Fund and BLBG:
Please provide a copy of any contracts or agreements between the Fund and
Bernstein Litowitz and any contracts or agreements between BLBG and the Klausner
firm related to the Fund.

The Fund Administrator responded:
We do not have a monitoring agreement with BLBG. When we first retained BLBG
we did so by letter/email asking them to represent the Fund.

On September 8, 2015, we again asked:
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Please provide any agreements the Fund has had with BLBG over the past 15 years.
125

http://www.forbes.com/forbes/2004/0920/150.htm

 And again we were told:

In conclusion, despite repeated requests we have never been provided
with any contract, agreement or letter between the Fund and its
“primary” securities litigation counsel—despite the fact that General
Counsel to the Fund has stated in a letter to the Board that such an
agreement exists.
The agreements Bernstein Liebhard and Berman DeValerio are relatively
new (2011 and 2012, respectively) and seem quite broad, indicating that
these firms will proactively identify instances of abuse by corporate
management and breaches of fiduciary duties under federal securities,
state securities, corporate and related areas of law.
Based upon information provided by the Fund Administrator, it appears
that no law firm monitoring the Fund’s investments over the period
from 1988 through 2008 notified the Fund of fiduciary breaches related
to Merrill Lynch Consulting Services early on—breaches for which the
SEC later took action against the firm.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

As I responded to your inquiry on Friday afternoon, we do not have a monitoring
agreement with BLBG. When we first retained BLBG we did so by letter/email asking
them to represent the Fund.

Whether any firm monitoring the Fund’s investments during this period
represented that it would notify the Fund of any such fiduciary breaches
should, in our opinion, be reviewed—if for no other reason than
determining whether the Fund should continue to rely upon any such
firm to identify key fiduciary breaches related to its investments.
In our opinion, it is important for public fund boards to keep in mind the
narrow services the class action securities law firms actually provide, as
opposed to the expansive capabilities these firms often claim. Further,

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 the contract between monitoring firms and public funds should reflect
the actual services being provided “for free” and firms which are not
performing pursuant to their contracts should be terminated.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

XXIII. Placement Agent Contingent Fees

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Placement agents are intermediaries or middlemen paid by external
investment managers to market and sell their investment products.
Placement agent fees are paid directly by money managers and
indirectly by investors through higher asset-based fees than would be
available absent the compensation arrangement between the manager
and the intermediary.
Under the economic theory of disintermediation, removal of the
intermediary from the process, i.e., “cutting out the middleman,”
reduces the cost of the service to the customer. Disintermediation
initiated by customers is often the result of high market transparency.
Markets lacking transparency often are plagued by undisclosed and
dispensable intermediaries.
The federal securities laws generally require that registered investment
advisers, when employing the services of third party marketers, provide
the client with a written disclosure document, commonly referred to as
a “solicitation agreement,” describing the terms of any compensation
arrangement between the solicitor (or marketer) and the investment
adviser, as well as “the amount, if any, for the cost of obtaining his
account the client will be charged in addition to the advisory fee, and
the differential, if any, among clients with respect to the amount or level
of advisory fees charged by the investment adviser if such differential is
attributable to the existence of any arrangement pursuant to which the
investment adviser has agreed to compensate the solicitor for soliciting
clients for, or referring clients to, the investment adviser.

 In our experience, the SEC has required registered investment managers
utilizing undisclosed solicitors to offer the public pension investors
rescission of the investment and return of all fees paid. Thus, failure to
disclose marketing intermediaries can have severe consequences for
investment managers.
The contracts drafted by the Board which we were provided in response
to our request126 between the Board and the Fund’s investment
managers generally include a provision stating that the manager
warrants that it had not employed or retained any company or person,
other than a bone fide employee working solely for the manager to
solicit or secure the contract and that it has not paid or agreed to pay
any person, company, corporation, individual or firm other than a bona
fide employee working solely for the manager any fee, commission,
percentage, gift or other consideration contingent upon or resulting
from the award or making of this contract.
In response to our specific question the Fund Administrator represented
in an email on August 31st that that no placement agent has ever directly
or indirectly received compensation related to the Fund.

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In summary, the disclosure requirements related to investment advisor
third party solicitation arrangements reflect the belief that the
investment advisory client should be advised of the existence of the
intermediary, the fees paid to the intermediary and whether he is
paying a higher fee as a result of the intermediary.

We note however, the following:
1. We were only provided with the most recent contracts to review.
Whether older contracts contained such provisions is unknown.
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2. Certain of the Fund’s investments, e.g., Eaton Vance Institutional
Senior Loan Fund and Silchester International Value Equity Group
Trust, were made pursuant to subscription agreements and, as a
result, there apparently were no representations regarding
placement agents with respect to these investments.

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3. Illiquid investments, such as those mentioned in item 2 above,
commonly involve the use of placement agents.
4. Since placement agent fees are paid by the investment manager,
the Fund Administrator may not be aware of any fee that may
have been paid.
5. Whether compliance with the placement agent prohibition has
been monitored or enforced is unclear.
XXIV. Conclusion
In our opinion, the Board has failed to provide oversight, consistent with
its fiduciary duties, with respect to matters as fundamental as verifying,
evaluating and reporting investment performance of the Fund over
time; investment manager and other vendor compliance with state and
federal heightened ERISA fiduciary standards adopted by the Fund;
monitoring conflicts of interest and establishing corresponding
safeguards; and reviewing, as well as assessing, the reasonableness of
investment management and other fees paid by the Fund.
While the Board, staff and others related to the Fund will, no doubt,
dispute some or all of these findings, we believe that providing all the
relevant information related to the issues identified in this report to the
public, regulators and law enforcement can only benefit all stakeholders
in the Fund, as well as the nation.

 Benchmark Financial Services, Inc. was founded by Edward “Ted” Siedle, a leading expert in
forensic investigations of pensions, focusing upon excessive and hidden investment fees and
risks, conflicts of interest and wrongdoing. A former SEC lawyer and industry executive with
over 30 years experience, he has investigated over $1 trillion in retirement plans. Prior
investigations include the state of Rhode Island, state of North Carolina, the Alabama State
Employees Pension, Wal-Mart, Cities of Nashville and Chattanooga, Town of Longboat Key,
Caterpillar, Boeing, Northrup Grumman, John Deere, Bechtel, ABB, Edison, Shelby County,
Tennessee, Fidelity Investments, JP Morgan, Sanford Bernstein, Banco Santander and the US
Airways Pilots Pension.
Siedle is a nationally recognized authority on investment management and securities matter
and has trained Department of Labor pension investigators around the country. He has
testified before the Senate Banking Committee regarding the mutual fund scandals and the
Louisiana State Legislature regarding pension consultant conflicts of interest. He was a
testifying expert in various Madoff litigations. Articles about him have appeared in
publications including Time, BusinessWeek, Wall Street Journal, The New York Times,
Barron’s, Forbes, USA Today, Boston Globe, and Institutional Investor. He widely lectures and
has appeared on CNBC, Wall Street Week, and Bloomberg News.
He writes about his groundbreaking findings as a contributor for Forbes.
Siedle was recently named as one of the 40 most influential people in the U.S. pension
debate by Institutional Investor for 2014.

Forensic Investigation of the Jacksonville Police and Fire Pension Fund

About Benchmark Financial Services, Inc.

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