Has CalPERS lost its mind? I’ve put in many Public Records Act requests over the years, and never got a response even remotely resembling the one former board member JJ Jelincic received when he asked CalPERS for information about the loans it has made, either on its own or possibly in loan syndications. CalPERS would rather claim it needs to hide the information because it might expose informants, which in that section of the code are usually police informants, who are usually trading inside information about criminal activities in return for reduced sentences or immunity. It’s troubling to see CalPERS assert it needs to protect parties like that because they were involved in investing trust funds.

Let me repeat: As Jelincic alleges, CalPERS looks so desperate to shield what it has been doing on the lending front that it’s willing to depict itself as tied up with crooks in order not to expose basic details about its loans. That would suggest that whatever one would find out about these loans would put CalPERS in an even worse light.

And mind you, as we’ll explain shortly, there is way more opportunity for flat out corruption via loans to favored parties than there is with investing in private equity, where CalPERS is at least dealing with large fund managers on an arm’s length basis who also have some, if admittedly weak, SEC oversight. Now admittedly, CalPERS could have made its private loans to date through so-called credit funds, which are limited partnerships typically operated by private equity firms, such as Apollo and Blackstone. But there’s no good reason to be so spooky about that. And on top of that, that sort of investment arguably should have been reported to the board.

We’ve attached Jelincic’s letter to CalPERS questioning its basis for largely rejecting his Public Records Act (“PRA”) request, as well the request proper. We’ll also discuss the limited amount of information CalPERS did provide, but bear in mind the PRA response is an admission that CalPERS withheld some of the information Jelincic sought.

This Public Record Act request is important for two reasons. First is to see what if any experience CalPERS has in entering into private debt deals. Recall that the now-departed Chief Investment Officer, Ben Meng, announced that CalPERS would be making large commitments to “private debt” as part of CalPERS’ “pile on risk in a desperate effort to meet our unrealistic return targets” strategy. This was alarming because CalPERS was about out to make risky loans, a hazardous undertaking even at the best of times, at the peak of the market, and even worse, when it has little to no existing expertise.

One sign of a frothy corporate lending market, well known to anyone paying even a modicum of attention to the financial press, is that lending terms for the last few years have been exceptionally favorable to borrowers, due to the Fed’s protracted super low interest regime producing intense chasing for yield. For instance, in 2019, Axios reported that “cov-lite” loans dominated the US and European markets. As its story explained:

The loans are called covenant-lite because they lack traditional loan requirements and offer less protection for lenders and investors than traditionally structured credits if borrowers default.

Since Meng left, CalPERS has insisted that it is full steam ahead with its private debt initiative, even though sticking doggedly to Meng’s plans would tie the hands of an incoming Chief Investment Officer and is likely to reduce the pool of candidates.

As part of that scheme, CalPERS sponsored AB 2473, which provided that private debt would not be subject to disclosure. During its lobbying for the bill, CalPERS argued it was necessary because CalPERS intended to act as a direct lender, meaning act as a bank and make its own loans to businesses, as opposed to simply investing in private debt funds run by seasoned players. Needless to say, this confirmed the worst fears about what CalPERS planned to do. AB 2473 would have also given “private debt” the same secrecy afforded venture capital if the fund chose to contract out the running of the program.

Sacramento insiders people believe the purpose of the private lending program is to help Mayor Darrell Steinberg get his wish for local ownership of the Sacramento Bee. Having a friendly lender provide most of the money on favorable terms would increase the attractiveness of the investment. And CalPERS would get the bennie of assuring that the Bee would continue to publish CalPERS’ spin. Notice how beneficiary interests are absent from this calculus.

The sponsor of the bill, Assemblyman Jim Cooper, pulled it after the Meng scandal broke.

The second reason this PRA is important is for the high potential for corruption. And let us not forget that this is a valid concern with CalPERS, given that its former CEO Fred Buenrostro is in Federal prison for taking bribes.

Recall that CalPERS investment staff now has very high limits for how much it can invest without getting approval of the board. This is the governance lapse that ought to have beneficiaries and California taxpayers deeply concerned. Look at how much various CalPERS executives can deploy on their own authority, with no board oversight.

Further notice the least senior officer listed, the MID, for Managing Investment Director, is the only one subject to a cumulative limit for the fiscal year. And as we saw with Ben Meng’s conflicted $500 million commitment to a Blackstone fund, such investments are subject only to one-line disclosure after the fact.

It is striking that board members don’t seem concerned about their legal exposure under this private debt initiative. The Public Employees Retirement Law, makes the board and only the board liable for the stewardship of trust assets. They can’t hide behind, “Staff did this, how were we to know?”

On top of that, misappropriation of public funds is criminal in California, and the government officer does not have to benefited personally to be liable. Does the board not recognize it is exposed by Ben Meng’s conflicted $500 million commitment to a Blackstone fund, as well as a $500 million Carlyle transaction initiated on his watch that still appears to be moving forward?

At a minimum, CalPERS needs to reboot these transactions to clear up the misappropriation exposure, since Meng’s high velocity departure is tantamount to an admission that something was seriously amiss. But CalPERS appears to be more afraid of private equity firms than the risk of wearing orange jumpsuits, despite the fact that that’s actually happened within the past decade.

The limited records Jelincic obtained shows that CalPERS is currently putting private debt in its “Opportunistic” category.

And the documents that Jelincic did obtain showed that you can’t figure out what is going on beyond the dollar amounts and maturity dates:

These records are also internally inconsistent. CalPERS can’t be both investing in securities and making a bank loan, particularly since it it not a bank. But in fact, Mesa West Core Lending Fund, L.P. is a roughly $4 billion commercial real estate lending fund, with over 50 limited partners, and has to file annual disclosures with the SEC. Given that the Mesa Core Lending Fund’s parent, Mesa West Capital, appears to regard Mesa West Core Lending Fund, L.P. to be subject to the SEC’s reporting requirement for private equity funds, one wonders why CalPERS has not included it in its mandate quarterly private equity fund disclosures.

And consistent with real estate lending not being secretive, the Mesa West site proudly lists quite a few “sample transactions” with addresses and photos, the purpose of the loan and closing date. Odds are decent that more details were reported at the time of closing in specialist publications or Crain’s Business.

On top of that, as most lawyers and bank employees will know, secured lenders make UCC (Uniform Commercial Code) filings. Among other things, UCC filings prevent the same collateral from being pledged multiple times. They are public records, typically filed with the Secretary of State. So again.

Normally when CalPERS turns down a PRA request related to investing, it tries claiming everything that uses a limited partnership structure is an “alternative investment” even when courts have said otherwise. Specifically, in 2010, CalPERS lost a lawsuit over its efforts to hide documents regarding a lossmaking real estate investment, Page Mill Properties. The judge ruled that real estate was a traditional investment and subject to disclosure. Nevertheless, CalPERS has taken the “sue us” posture, continuing to reject PRAs for information about real estate investments.

CalPERS also typically cites a catchall provision, Government Code Section 6255(a), which amounts to “we think the public is better served by our hiding the records.” California courts have consistently rejected this section as a rationale for evading disclosure.

By contrast, as Jelincic points out, the pretexts CalPERS offers are not just novel but also come off as desperate. As you can see, the PRA response (the second embedded letter) invokes Califorinia Government Code Section 6254, which incorporates Evidence Code section 1040, subdivision (a) and section 1060. From Jelincic’s letter (emphasis original):

Section 6254 (k) reads “Records, the disclosure of which is exempted or prohibited pursuant to federal or state law, including, but not limited to, provisions of the Evidence Code relating to privilege”

You cite Evidence Code section 1040. I can only assume that you know Evidence Code section 1040 et seq. is about protecting the identity of confidential police informants. If the disclosure of borrowers and the term of the loans would actually disclose confidential informants the private debt program is a cesspool in which no prudent fiduciary would invest trust assets.

Which is it, a bad faith claim of exemption, a cesspool or both?

You also cite Evidence Code section 1060 which reads “lf he or his agent or employee claims the privilege, the owner of a trade secret has a privilege to refuse to disclose the secret, and to prevent another from disclosing it, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice.” You do realize that Evidence Code section 1060 et seq. refer to criminal cases? I would assume you do since you chose to cite it. I guess that is why a confidential informant might get exposed.

At best, CalPERS appears to be tilting at windmills in its unusually extensive to ‘splain why it does not have to disclose what it has been up to with its lending. As one lawyer remarked:

A court would find the “in confidence” provision not “in the interest of justice” under EC 1040 because it is designed to mislead the public and to disguise conflicts of interest and undue influence.

Finally, although less scandalous-looking, CalPERS effort to claim trade secret status is ludicrous. First, it can’t credibly apply to any information that its lenders provided to CalPERS in any assessment process. Lenders don’t receive anywhere near as much information about a company’s strategy because lending reviews aren’t to assess upside but downside. They are much more concerned about historical performance and any reasons to worry that might not continue.

And “trade secret” is a rarefied standard. It is so important that it is central to a company’s success, like the formula for Coke, and is not shared with external parties due to the risk to the business.

Second, if CalPERS claims anything it is doing in the investment arena could possibly be considered bo to a “trade secret,” it would be laughed out of court. Has CalPERS high on its “innovation” PR?

Jelincic’s letter shows that CalPERS has gone into “The lady doth protest too much” in its desire to hide its private lending. Given the hot water CalPERS is already in, this is not the sort of behavior that engenders confidence.

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