Trouble at CalPERS: Abrupt exit hits $400-billion state pension fund

The news landed just after 9 p.m.: The investment chief at California’s massive state pension fund was abruptly stepping down. Before dawn the next day, Sacramento was abuzz — and a sense of crisis was descending over the mighty California Public Employees’ Retirement System.

Wednesday night’s shock departure of Ben Meng reverberated through the state capital and then across Wall Street on Thursday, where the $400-billion CalPERS is a powerful player in everything from the stock market to private equity. Meng said in an interview that he’d left to focus on his health and family. But a statement from the state controller pointed to something else: an unspecified lapse in judgment that breached conflict-of-interest rules and, even more, hinted at wider oversight problems inside the organization.

The controller, Betty Yee, has called for an emergency board meeting to review the funds’ policies. The suggestion that CalPERS — a frequent advocate of good corporate governance — might have fallen short of its own conflict-of-interest rules set tongues wagging in the financial industry.

So, too, did Meng’s abrupt downfall after a brief, tumultuous run marred by underwhelming investment returns and wild conspiracy theories about his supposed links to the Chinese Communist Party. Issues around his personal financial disclosures seem to have been the final straw.

“Clearly it’s yet another black eye” for CalPERS, said former board member J.J. Jelincic. “We ought to be able to do better.”

The latest controversy began Sunday with a post on the Naked Capitalism blog. The author detailed what she said were false and incomplete financial disclosures by Meng in his role as CalPERS’ chief investment officer, as well as compliance failings by the pension plan.

In a statement, Chairman Henry Jones said CalPERS was aware of questions surrounding Meng’s filings. “These are private personnel matters and already have been addressed according to our internal compliance protocols,” he said.

The disclosure requirements fall under California law regulating conduct by public officials and are overseen by the state’s Fair Political Practices Commission. As a public employee, Meng had to file Form 700 submissions detailing his personal financial interests.

“I have disclosed all of my financial holdings on applicable forms, and I have no further comment,” Meng said in a telephone interview.

While Yee didn’t specify the issues surrounding Meng, her comments suggested the need for a broader review of problems at the pension fund.

A veteran of Morgan Stanley, Lehman Brothers and Barclays Global Investors, Meng first joined CalPERS in 2008. Born in China in 1970, he became a U.S. citizen in 2010 and returned to the country of his birth in 2015 to work as deputy CIO at the State Administration of Foreign Exchange, also known as SAFE. He began his job running CalPERS’ assets in January 2019 “to serve those who serve California,” he said in an interview shortly after he started.

What may have been a dream job soon turned sour for Meng. He faced not only the immense pressure that comes with running the largest public pool of money in the U.S. — which needs to gain 7% a year to meet its obligations — but also came under attack because of his time in China.

Earlier this year, he was accused by Rep. Jim Banks (R-Ind.) of being a tool for the Chinese government, funneling American money into Chinese hands due to his role at SAFE. Sen. Tom Cotton (R-Ark.) and Rep. Liz Cheney (R-Wyo.) expressed support for Banks’ inquiry into CalPERS’ and Meng’s ties to the Chinese government.

Meng rejected the claims and was supported by prominent Wall Street investors including Oaktree Capital Group founder Howard Marks and Blackstone Group Inc.’s Stephen Schwarzman.

Harder to dismiss was CalPERS’ failure to hit its annual 7% target during his tenure. The fund reported a return of 4.7% for the latest fiscal year, after gaining about 6.7% in fiscal year 2019.

In a statement early Thursday, CalPERS said Meng had helped the fund beat its “benchmark of 4.3% during a time of extreme financial market volatility sparked by the coronavirus pandemic.” Later in the day, the organization thanked Meng for his service and said he “put us on a positive path forward.”

Meng on Thursday defended his tenure at the fund, saying he was “proud of the work we did to change the portfolio, build a skilled investment office, and set CalPERS on a strong path to achieve our return target.”

In June, he told the board that more assets needed to go to buyout funds and private credit. In a departure from its past as a conservative holder of stocks and bonds, he said the pension would have to use leverage to enhance returns.

While CalPERS saw its assets plunge by $70 billion in late February and March as the COVID-19 crisis hurt global markets, it has said it recovered almost all of that value by June. Meng said Thursday that the recovery was evidence that his changes had been effective.

California Controller Yee said in her statement after the emergency CalPERS board meeting that she will need to address “the CEO’s oversight and implementation of these policies and any additional safeguards necessary to ensure this does not happen again.” She didn’t elaborate on what the issues were.

Varghese, Schatzker and McDonald write for Bloomberg.