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Justice Department investigation of PSERS ‘has closed’ with no charges. SEC probe goes on.

“We understand from the closure of the investigation that DOJ will not be pursuing civil or criminal charges,” the PSERS board chairman says.

Chairman of the PSERS board, Chris Santa Maria, during a meeting in Harrisburg in 2021.
Chairman of the PSERS board, Chris Santa Maria, during a meeting in Harrisburg in 2021.Read moreKalim A. Bhatti

Federal prosecutors have told Pennsylvania’s school pension system, PSERS, that the U.S. Department of Justice has closed its investigation of the $70 billion, state-funded retirement plan, board chairman Chris Santa Maria told plan members in a brief statement Tuesday.

“We understand from the closure of the investigation that DOJ will not be pursuing civil or criminal charges,” Santa Maria told The Inquirer.

”The investigation has been closed,” confirmed Jennifer Crandall, a spokesperson for the U.S. Attorney’s office in Philadelphia. She said the office had no further comment.

More than $6 million in legal fees

That report removes a shadow that has hung over the agency for 15 months, as the Public School Employees’ Retirement System piled up more than $6 million in outside legal defense and consulting bills.

PSERS’s 15-member board of state officials, legislators, teachers and school board representatives, backed by $5 billion a year from taxpayers and $1 billion in annual staff payroll deductions, approves and oversees investments that help fund retirements for a half-million working and retired school staff.

Pension leaders have been distracted responding to demands by investigators for information, wondering whether the government would press charges. Citing the fund’s performance over the previous decade, some trustees called for terminating its top officers, who retired while the probe was ongoing.

» READ MORE: PSERS trustees brag plan is ‘number one,’ staff warns of risk ahead

Santa Maria and senior staffers won’t say more about their reaction to the news, as long as another probe — by the federal Securities and Exchange Commission — continues: “We have no further comment at this time, as the SEC investigation remains ongoing,” Santa Maria said.

”Although it is good that the Department of Justice investigation did not identify any criminal wrongdoing, it is not an occasion for celebration,” said state Treasurer Stacy Garrity, a PSERS trustee. “We must continue pushing for reforms to reduce investment costs and complexity” and “increase transparency,” so the public can have confidence in the plan, she added.

What the FBI was investigating

The Inquirer first reported the investigation in March 2021. FBI agents served subpoenas on PSERS and its top officials seeking information about possible “honest services fraud” at the agency.

The subpoenas were sent on behalf of a federal grand jury in Philadelphia, where prosecutors sought information on two series of events:

  1. The system’s exaggerated investment returns for 2011-20, which PSERS later revised, forcing higher pension contributions from 100,000 mostly younger teachers to support their retirement. An internal investigation blamed errors on a consultant, Aon, which continues to manage PSERS data.

  2. A series of land purchase decisions in Harrisburg, which the internal review later found were made by pension system managers who did not share information about the deals with trustees, the way they did with most investments.

The news that the government is closing the file was cheered by a lawyer for Glen Grell, PSERS’s former executive director, who announced his retirement last fall.

“The Department of Justice did the right thing,” said Grell’s lawyer, Marc Raspanti of Philadelphia. “As we repeatedly said, there was never a case here. My client is very pleased.” Grell is retiring to Florida to be with family, Raspanti said.

A lawyer for chief investment officer James Grossman Jr., who also stepped down, didn’t respond to a request for comment. Grossman was an architect of PSERS’s strategy of relying more on private investments, which critics said reduced PSERS returns compared with other funds during the long bull market in U.S. stocks. His supporters said Grossman was vindicated when the stock market fell this year. In June, Grossman gave a keynote speech on investments to the CFA Society Philadelphia’s Endowment Foundation and Philanthropy Conference.

Some had hoped the investigation would have yielded more about how public investment decisions are made. “The industry was eagerly awaiting any additional revelations,” said Ted Aronson, a veteran Philadelphia investor whose past clients included public retirement plans.

Last August, the Securities and Exchange Commission began a separate investigation into both the miscalculation and possible conflicts of interest arising from travel and other gifts given to PSERS staff by Wall Street investment contractors.

Unlike federal prosecutors, who may bring criminal or civil charges, the SEC brings only civil complaints, which are often resolved with fines, said lawyer Michael Schwartz. As a former federal prosecutor, he headed the public corruption unit at the U.S. Attorney’s office in Philadelphia, which later launched the PSERS investigation.

The FBI began its probe in early 2021 after the pension fund board admitted publicly that it had erred in adopting an official figure for investment profits. The matter was significant because, under state law, newly hired teachers pay more into the pension system when it falls short on profit targets. At the time, the profit goal was a return of at least 6.36%.

Aon, the PSERS consultant, told the board that the fund had just cleared the target with a return of 6.38%. This supposedly spared the board the embarrassment of missing the target and the teachers a rate hike. In fact, the board later acknowledged, the return had fallen just short, reaching only 6.34%.

In contrite letters, Aon later told the board that someone on its staff had made a clerical error, inputting wrong figures.

It’s rare for the government to say a case is “closed,” said Bill Singer, a veteran Wall Street securities lawyer, citing Justice Department public-information guidelines. “The default mode is to let things die a silent, tortured death.”

But “in cases where news of an investigation has leaked into the press,” there can be “compelling reasons to clear the air if and when an in-house decision has been made that the investigation is going nowhere,” Singer added. Investigators may have felt “the need to lift a cloud from a pension fund.”

The SEC is still on the case

If the SEC believes it has found criminal behavior, it can refer the case to other agencies. But Singer thinks it’s “highly unlikely that the Department of Justice would reset a criminal prosecution after publicly informing a target (or) subject that it had closed the matter.”

Board members said Santa Maria has told them one of the system’s law firms, Morgan Lewis & Bockius in Philadelphia, had received word from prosecutors that they were closing the case. Zane David Memeger, a former U.S. Attorney for Philadelphia and a member of PSERS’s defense team at Morgan, didn’t respond to a request for comment.

Some trustees said they hope to learn more at PSERS’s scheduled summer board meeting on Friday, when both “pending and potential” litigation will be discussed in closed session.

Another trustee, State Sen. Katie Muth (D., Pa.), said the announcement had left board members needing to know more. Board members as a group “have not heard from Morgan Lewis in months,” she said. “We still haven’t seen the presentation [the firm] made to the Department of Justice. And I haven’t seen the documentation supporting this news.”

Despite ongoing reviews and updates to PSERS policies, some of which board leaders promised to tighten after consultants finished the internal investigation, governance and investment reviews, Muth said little has really changed: PSERS staff “are still not disclosing state investment contract information to us, the board members” who approve new investments.

“Until they do, I have to see the private investments they continue to recommend to us as shady.”

Federal scrutiny ought to remind trustees that they would do well to show the same “duty of care, loyalty, (investment) diversity,” and fidelity to plan guidelines as their more-regulated private-sector counterparts, said Olivia Mitchell, director of the Pension Research Council at Penn’s Wharton School.

“Lack of transparency between the trustees and management is likely to make it difficult, if not impossible, for the trustees to carry out their duties,” Mitchell said.