Let Me Help You Sell Your Crappy Product to the Dumbest Investors

From John Curry

August 25, 2024

Does this chapter of Siedle's book How To Steal A Lot Of Money - Legally sound a lot like what has happened (and is happening) at STRS?

LET ME HELP YOU SELL YOUR CRAPPY PRODUCT TO THE DUMBEST INVESTORS

I am often asked by scammers peddling dubious investment schemes how to get state and local government pensions to invest in their crap. It's no secret that these pensions are generally the dumbest investors in the room, so plenty of Wall Street fraudsters want a piece of that stupid money.

Here's how these conversations would go---if the scammers were telling the unvarnished truth.

Mr. Wall Street: I have created a high-cost, high-risk private equity investment fund and I want to get fabulously rich. I want to tell investors that the fees I charge are around 3% but I intend to take another 3% or so secretly. I want to roll many of the lavish expenses I have, including my jet and yacht, into the fees I charge clients. I want all the money the client invests with me to be wired offshore---into an account I've established in the Cayman Islands to avoid paying U.S. taxes. I do not want to have to provide any financial statements or audits by independent certified public accountants to clients. I'm really looking for clients who are willing to let me create rosy valuations for the underlying companies in which I invest client money. And I want clients who are likely to accept my claims of "great performance" without any verification by an independent third party. Maybe I'm asking for too much......

Marketing Consultant: You're not and I have the perfect prospects for you---public pension funds established for state, city, county and other local government workers and funded by taxpayers.

Mr. Wall Street: Why state government funds? I've had bad experiences with the federal government---the IRS and the SEC. I want to steer clear of government entanglements.

Marketing Consultant: State and local governments that run pensions have long been exempt from almost all federal oversight. Most important, unlike corporate pensions you may be familiar with, they are exempt from federal pension regulations (ERISA). IRS oversight is minimal-to-nonexistent and even when investment scandals arise, the SEC is wary of getting involved in state and local matters that are likely to be highly political. So there's no need to worry about the feds---they ignore, want nothing to do with the trillions sitting in those funds. Likewise, the state and local funds are generally unaware of, and don't care a damn about, fines and disciplinary actions by the feds against firms like yours.

And state laws governing these pensions are virtually nonexistent. No worries here.

Mr. Wall Street: That all sounds great but what about state regulators like attorneys general?

Marketing Consultant: Most AG's and other state regulators are elected officials who need to raise money to get reelected and can easily be swayed to look the other way when Wall Street is involved. The last thing they want to do is accuse other elected officials--possibly in their own political party--of stealing from pensions. Pension theft cases are hard to win to begin with, when you add in the politics, no AG will prosecute.

Mr. Wall Street: That's good news. But, aren't these state government contracts subject to competitive bidding in Requests for Proposals (RFPs) and lots of disclosures? That is way too much transparency for me. I prefer to work under the radar--in the shadows.

Marketing Consultant: Competitive bidding and RFPs may be commonplace in the federal government contracting world but with the right lobbyists, you can avoid this annoying process with state and local governments. With secret no-bid contracts you can hide all your excessive fees and outlandish expenses, disavow all fiduciary duties as you engage in criminal conduct, and even park the pension cash in the Cayman Islands far from American legal safeguards. The key is identifying precisely what you want to get away with and building it into your contracts. The lugnuts at the pension will sign whatever you give them--they're clueless.

Mr. Wall Street: Aren't there Freedom of Information Acts or access to public records laws in every state that would let these secret dealings get out? Isn't the public entitled to know how these public moneys are being invested? The last thing I want to even have even a single investor in my fund that might be required to disclose to the world what I'm doing. I'd be screwed!

Marketing Consultant: Not to worry. Over that past decade your colleagues on Wall Street have been working hard to eviscerate public records laws from sea-to-shining-sea. The current ploy is to claim "trade secrets" in your contracts to hide the fees and other scamming. If you grease the right palms with state officials, they will agree to that "trade secret" designation without hesitation. Also, some managers are inserting into their contracts that they will not disclose to the pension any information which the pension may have to disclose to the public under state freedom of information acts. Again, if you know what to ask for--your wishes shall be granted.

Mr. Wall Street: Many of the larger pensions have layers of investment staff--how do I convince them to go along with my scam?

Marketing Consultant: You invite lower-level, less-well-paid pension staff to sit in on so-called "Advisory-Committees" and lead them to believe this will lead to high six and seven figure Wall Street jobs in the future. Be sure to hold the committee meetings offshore in exotic locations with lavish meals and entertainment----make sure staff feels part of the team--and they will look the other way at the high fees, self-valuation and other bad behavior.

Mr. Wall Street: How do I pay off politicians and other decision-makers without getting caught.

Marketing Consultant: We used to have middlemen called placement agents who would place your bets (bribes) for you, but now thanks to the corporate-friendly United States Supreme Court we have the Citizens United decision which allows almost unlimited donations called "Dark Money." Most governors, mayors, political parties, and caucuses for legislators, as well as unions, have Dark Money vehicles that can be used to ensure their cooperation and support.

Mr. Wall Street: I've heard stories about pension plans where the board members like lots of entertainment--i.e., strippers, drugs, expensive meals, and fine wines. Should I anticipate spending big on these items?

Marketing Consultant: Well, naturally, keeping clients happy is never a bad idea--as long as you and your clients are discreet. Go offshore or thousands of miles from home to help avoid any embarrassments. Many times, this helps make the sale. Nonetheless, entertainment--no matter how luxuriant--will almost certainly be a minor expense compared to the bigger Dark Money costs.

Mr. Wall Street: I have to be frank with you. The prodigious fees and expenses I charge to clients will probably make my investment performance uncompetitive, at best. There are certainly better-performing investments out there. How will I keep the business? How performance-sensitive are these funds?

Marketing Consultant: You have absolutely no reason to worry about poor performance. Fortunately, public pensions have no problem with private equity managers like you valuing the underlying companies in which you invest by yourself without any independent third-party verification. So, your performance should always be great. The performance is whatever you tell them it is. As long as the pension staff and any consultants they employ have no access to the underlying assets--as long as you keep them in the dark about the portfolio--they couldn't dispute your self-serving valuations if they wanted to. And, trust me, they don't want to. They have much more to lose from full transparency than telling on you. You can sleep soundly knowing that whatever crooked deal they agree to with you, you're not alone. There are plenty of other Wall Streeters feeding at the trough.

Mr. Wall Street: I'm sold! Let's get some of that dumb money!

Note: The above words were taken from Edward Siedle's book How To Steal A Lot Of Money Legally (2021).