As FBI and SEC probes grind on, Pa. state treasurer holds off paying big pension fund’s defense lawyers

As legal costs stemming from federal probes of Pennsylvania’s biggest pension fund crest $1.6 million, the state treasurer has been rejecting or holding off paying charges submitted to the PSERS plan by the high-priced law firms it has hired to cope with investigations by the FBI and financial regulators.

Treasurer Stacy Garrity, a fund board member who has emerged as an increasingly sharp critic of PSERS management, has refused to pay a $276,000 bill submitted by the Washington office of Pillsbury Winthrop Shaw Pittman, on grounds that its charges were “unsupported.”

Garrity also has yet to pay $321,000 to the large Philadelphia firm of Morgan Lewis & Bockius — lawyering billed at an average rate of almost $700 an hour. PSERS sources say board members, including Garrity, want a similar clarification of what Morgan Lewis has done before the money is paid.

Garrity declined to elaborate on her refusals. But the sources say she and some other board members have complained in closed-door board meetings about the two firms’ work to defeat a legal challenge filed against the fund by yet another board member.

State Sen. Katie Muth (D., Montgomery) has brought a pending civil suit in state Commonwealth Court accusing the fund of stonewalling her demands for information. Garrity and board member Joe Torsella, her predecessor as treasurer, have filed court briefs in support of Muth.

Five lawyers from Morgan Lewis and Pillsbury have signed off on legal pleadings attacking the Muth lawsuit, including William Sullivan Jr., the head of Pillsbury’s white-collar criminal defense and corporation investigations section. He is charging PSERS $925 an hour, which the firm says is a 35% discount from his usual rate, records show.

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For its part, Pillsbury has not resubmitted its bill since it was returned Sept. 21, said Erik Arneson, spokesman for Garrity. He said the treasurer and PSERS were working to resolve issues “in a timely manner.”

Sullivan did not respond to calls Tuesday seeking comment. Nor did a spokesperson for Morgan Lewis.PSERS said Wednesday it would have no comment on billing issues.

PSERS — the Public School Employees’ Retirement System — oversees pensions for about 500,000 working and retired teacher and other current or former school staff. It has been whipsawed by events both external and internal over the year, facing probes by both the FBI and the U.S. Securities & Exchange Commission and turmoil on its board about its lackluster investment returns.

The federal authorities are digging into a decision by the board to adopt an inflated figure, later recanted, for the fund performance results, as well as the system’s purchases of industrial buildings and parking lots near its Harrisburg headquarters.

In all, PSERS had hired at least six private law firms to assist its in-house lawyers since federal prosecutors in Philadelphia first served grand jury subpoenas on the fund in March. These outside lawyers have run up charges of $1,692,000 so far, state records show. Not all charges have come due.

Among the firms, Morgan Lewis says it is owed the most, $956,000, though it has yet to bill the agency for all of that. Pillsbury is next, racking up total charges of $381,000. Along with seeking to kill Muth’s lawsuit, the two firms have been mainly focused on dealing with federal prosecutors, the FBI, and financial regulators.

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The fund also hired the firm ofWomble Bond Dickinson US LLP. It has been conducting its own parallel investigation into any wrongdoing at the big pension fund.

Garrity, a Republican, was elected to the treasurer’s post last year. Her office approves state spending and has the authority to hold up payments if it is not satisfied with invoices.

This summer, Garrity did approve paying $141,000 to Womble. Another Womble bill of $61,400 was sent back unpaid, also “due to unsupported staff changes,” but has been resubmitted at a slightly lower amount — $59,800. Another bill for $13,000 is pending. Under terms of its PSERS contract, it may be paid up to $367,600.

Finally, PSERS has also been paying for individual lawyers for staffers caught up in the probe. It said Wednesday that eight employees had lawyered up in this way.

» READ MORE: Two Pa. treasurers — one current, one former — agree giant pension fund is suppressing information

State records do show, however, that taxpayers have paid $141,000 so far this year to Kleinbard LLC, a Philadelphia law firm. Matthew Haverstick a top firm lawyer, is representing PSERS investment chief James H. Grossman Jr. PSERS would not say whether the firm represents other clients from PSERS.

No charges have been brought against anyone in the investigations.

In an interview, Muth said the legal challenge to her case had no legal underpinnings.

“How are we paying them to represent PSERS in court [against] my litigation when the board never voted on it?” she asked.

Board members contacted by The Inquirer, some of whom spoke on condition they not be identified, said they expected the issue of payments to the firms would be addressed in a PSERS board meeting set for Wednesday evening, possibly by reaching new deals with the firms. The agenda for the meeting says the board may adopt new contracts terms for Pillsbury, Morgan Lewis and Womble.

“There’s been some issues — contracts with the state are always a challenge,” said Eric DiTullio, a board member from the Pittsburgh area elected to the panel to represent school districts.

This article was updated to include a response from PSERS.