Criminality, CalPERS Style: Board Members Misappropriate Public Funds by Signing Blank, Undated Expense Forms

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Pictures really can be worth a thousand words.

The images below and related evidence demonstrate conclusively that many, perhaps most, CalPERS board members have been filing fraudulent expense forms on a regular basis, some over a period of years. This is a written policy, codified in CalPERS’ board manual and is clearly intended to circumvent California state requirements.

The Board Services Unit, which reports to the Board President, asks board members to pre-sign blank sheets of paper with just a blank signature line printed on them. The Board Services Unit later prints onto that signed blank page the body of the travel claim form, with the dollar amounts and date filled in, and submits it on board members’ behalf.

Importantly, the form that CalPERS board members have been endorsing in blank requires the signature to certify a statement contained immediately above the signature that validates the accuracy of the information submitted on of the form. As you can see in one of the photos below, that certification is deliberately omitted from the nearly blank page that the board members sign in advance.

That means the Board Services Unit, the Board President as their supervisor, and the board members pre-signing these forms are systematically producing false documents.

This practice is a prescription for fraud. The board members who autograph these pieces of paper are knowingly allowing other individuals to present cobbled-together travel expense forms illegally, as bona fide originals. Under the California Government Code, this is considered to be providing a false account, a form of misappropriation of funds. That is a crime pursuant to Penal Code 424(a)(3).

In addition, what is to prevent members of the Board Services Unit from using these pre-signed forms to embezzle or create entirely different cobbled together document from the many undated, almost entirely blank pages board members have supplied to them?

Anyone, whether a board member or a CalPERS employee, who knew about this practice and failed to try to stop it is unfit to serve as a fiduciary and needs to resign. They have demonstrated a complete disregard for proper controls and compliance with the law. If they are so casual about risks to themselves, which we will discuss further below, how can they be regarded as competent to act as stewards of hundreds of billions of dollars of CalPERS beneficiaries’ funds?

As Andrew Silton, former Chief Investment Officer for North Carolina, said by e-mail:

There’s a pretty simple rule in the realm of public pension management. You don’t sign blank signature pages whether it’s an investment management contract or an expenditure report. During my tenure as CIO for North Carolina we sometimes had to go to great lengths to get entire contracts and reports into the hands of the State Treasurer (the sole fiduciary) because he had to know what he was signing. Whether he was committing the pension to a multi-million dollar contract or requesting reimbursement for a few hundred dollars of travel expenses, he was drawing funds that belong to the pension trust. His signature, and at times my signature, had to be attached to completed documents.

Filling out expenditure reports was often a cumbersome task, and I needed help on numerous occasions to get the figures into the correct boxes on North Carolina’s expenditure form. So I suppose it would have been convenient to just sign a bunch of blank forms and dump a stack of receipts on someone’s desk. Aside from violating the law, this would have sent a terrible signal to staff and invited abuse.

Travel expenditures are a precious commodity in pension management. They allow fiduciaries and staff to perform proper due diligence. When abuses are unearthed (e.g. padding expense reports) public pensions tend to crack down. Not only is the abuse addressed, but legitimate travel is also curtailed.

The board of CalPERS shouldn’t need any training or lawyers to help them understand the importance of protecting the expenditure process. It’s amazing to me that all but a few board members at CalPERS seem to have no qualms about signing blank expenditure forms. Once again, it appears that senior staff rather than the board is in control at CalPERS.

And our banking expert Clive remarked:

What’s especially shocking is the casual blasé attitude which was exhibited to Brown. This is obviously endemic maladministration – if not an open invitation to dip one’s hand into the well stocked and easily accessible cookie jar.

The Pre-Signed Form Fraud Is Official CalPERS Policy

On January 15, the day before Margaret Brown’s first day as a board member at CalPERS, she attended an orientation meeting with fellow incoming board member David Miller. Members of the Board Services Unit, all but one of whom are relatively low-level administrative staff, led the briefing. They gave Brown a raft of forms to sign and hand back to them. This is what she was given:

Brown signed them in front of staff before saying she wanted to look at them some more and took the folder with the signed copies with her. She did not return them. David Miller says he did not turn in any pre-signed forms either.

In the interest of not taxing reader patience, we’ll focus on the second form; for those who are curious, the first is the Excess Lodging Rate Request form (STD 255C), which .

Note that the second image, with the almost entirely blank page, is in fact the last two lines of the official State of California travel expense claim form embedded at the end of this document. Note that the certification language that sits right above the signature line has been omitted from the blank form Brown was asked to sign:

I HEREBY CERTIFY That the above is a true statement of the travel expenses incurred by me in accordance with DPA rules in the service of the State of California. If a privately owned vehicle was used, and if mileage rates exceed the minimum rate, I certify that the cost of operating the vehicle was equal to or greater than the rate claimed, and that I have met the requirements as prescribed by SAM Sections 0750, 0751, 0752, 0753 and 0754 pertaining to vehicle safety and seatbelt usage.

And it is no accident that Brown and Miller were asked to sign about 20 copies of each form. This is a page from the CalPERS Board Manual:

As the images show, the Board Services Unit instructs board members sign undated forms in blank, with the body of the form, including critically, the certification language removed.1 Staff prints the rest of the form, including the missing certification language, into the pre-signed document when they also fill in expense information and submit it on behalf of the board member.

Board President Priya Mathur and General Counsel Matt Jacobs Refuse to Stop the Fraud

On January 17, 2018, during a break at a board offsite, Brown told a fellow board member, Richard Costigan, who is also an attorney, that she was concerned about being asked to sign blank forms. Costigan said in no uncertain terms that she should never sign a blank document. General Counsel Matt Jacobs overheard the discussion, and spoke up to confirm that it was improper and also said it needed to stop. He said he would speak to the Board President, Priya Mathur, about it.

More than a week later, on January 25, Brown and Mathur had a scheduled introductory phone meeting. By e-mail that day, Brown told Mathur she was troubled about the practice of asking board members to sign blank documents and also told her that Matt Jacobs had said the process needed to be discontinued. Mathur replied by e-mail she would look into it and get back to Brown. Brown’s impression was that this was the first time Mathur had heard any objection.

Brown has heard nothing further about the issue. There is no evidence that Mathur has taken any action. There have been no new pages issued to the board manual to replace the instructions now in there, nor have there been an e-mails to board members outlining changes in procedures.

We e-mailed Priya Mathur and asked for her to comment on how, as a vocal proponent of sound “Environmental Social and Governance” (“ESG”) practices, could she justify having board members pre-sign undated blank forms. We did not receive a response.2

Why Filing Pre-Signed Expense Forms is a Felony

The implication of the institutionalized practice of: 1) using pre-signed partial forms, 2) using them to fabricate documents that are falsely submitted as complete originals, and 3) using them as the basis for making of payment is that the current Board President, Priya Mathur, her predecessor, Rob Feckner, and members of the Board Services Unit have suborned board members to provide false certifications on an ongoing basis.

In addition, both the pre-signing of the travel claim forms and the submission of the false certifications is criminal conduct. Per Title 12 OF CRIMES AGAINST THE REVENUE AND PROPERTY OF THIS STATE, Section 424:

(a) Each officer of this state, or of any county, city, town, or district of this state, and every other person charged with the receipt, safekeeping, transfer, or disbursement of public moneys, who either:

3. Knowingly keeps any false account, or makes any false entry or erasure in any account of or relating to the same; or,

4. Fraudulently alters, falsifies, conceals, destroys, or obliterates any account;

Section 424(a)3 is colloquially called the “misappropriation of public funds” statute. Merely providing a “false account,” as in false certifications or doctored records, is a crime in and of itself.

In addition, Chapter 8 of the California Government Code makes conspiracy a crime, and defines it broadly in Section 182:

(a) If two or more persons conspire:
(1) To commit any crime.

This means that not only have the “officers of the state” meaning Board Presidents Mathur and Feckner, along with any board members who pre-signed travel expense forms, apparently misappropriated public funds as defined under the law, but they and the members of the Board Services Unit who prepared and submitted the forms also look to have committed an additional felony, that of conspiracy.

All board members who engaged in this practice need to resign, starting with former Board President Rob Feckner and current Board President Priya Mathur. This institutionalized flouting of California law designed to deter expense abuses by upping the ante for violations by requiring a certification shows they are incapable of handling their own affairs.

How Phony Travel Claim Forms Are Business as Usual at CalPERS

It is not hard to see how handing over multiple copies of blank signed documents is reckless. Any board members who did so set themselves up to be blackmailed for submitted false expense claims.

Recall how common it was during the housing bubble to have brokers tell unsophisticated buyers, “Just sign the mortgage application. I’ll fill it out for you based on what you told me and I’ll submit it.” They then would inflate the borrowers income…and it was the borrower, not the broker, who was guilty of defrauding the lender, because the borrower’s signature was on the form.

If you say, “Oh no, you are exaggerating. There’s nothing that can go wrong. The board member approves the document before it is turned in,” I have a bridge I’ve already sold you.

Board members have no control over what is submitted in their name once they have handed over their signature without a date on a virtually blank piece of paper. They have nothing in writing restricting the use of that signature and thus are solely responsible if that signature were abused.3

For instance, a staff member could use the pre-signed forms to embezzle by putting in expenses under a board member’s signature and then depositing the check to their own account. A staffer could also use the pre-signed forms to blackmail a board member by submitting phony expenses, and then send the check to an organization that the board member could be depicted as supporting, like their alma mater. They wouldn’t even have to risk committing forgery by endorsing the check over; organizations of any size have their checks bulk processed and no one seems to verify the payee name.4

In California, any individual convicted of a felony is ineligible to run for office. The behavior exposed by this post would appear to make them legally ineligible to serve if convicted, since “falsification of public account records” is a blanket disqualification from holding office in California.

While only a prosecutor could bring a case against CalPERS board members, any government body that is a CalPERS member would have standing. There are a lot of small districts that are mighty unhappy with the bills CalPERS has been sending to them. District attorneys are elected officials. It would be popular in a lot of corners of the state right now to take down some CalPERS board members. It’s also conceivable that some jurisdictions could team up on a filing.

Another benefit for a politically ambitious prosecutor is that any board members who engaged in this practice weren’t guilty of mere negligence but gross negligence (the sending back of the e-mail with the false certification and the repeat nature of this practice means it’s hard to depict a board member’s participation as an accident). This mean their directors’ and officers’ insurance carrier would likely dispute any claims to cover their legal defense.

CalPERS board members are fiduciaries. The relevant standard for the performance of their fiduciary duties is set forth in Article XVII, Section 16 of the California constitution:

(c) The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.

No “prudent person” acting with care and diligence would give others the ability to steal from CalPERS or the to give people over whom you have no control the ability to blackmail them by signing blank forms authorizing the movement of money. This is common sense. The fact that CalPERS board members failed such a basic test means they have proven they are unfit to oversee a dog pound, much the less hundreds of billions of beneficiary funds.

This practice confirms that CalPERS is rotten top to bottom. All board members who have signed these blank forms or promoted their use need to resign. I hope you will circulate this post widely and encourage everyone you know in California to write their state Senator and Assemblyman about this immediately. We’ve written for years that CalPERS is a governance train wreck. A $300 billion pool of money with a board that refuses to ask even the most basic questions is a prescription for rampant incompetence and looting. This example is simple and egregious enough that it might galvanize long-overdue corrective action.

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1 Note even the certification language on the form does not comply with the statutory requirement. the missing language is in italics below:

I hereby certify that the above is a true statement of the travel expenses incurred by me in accordance with the Department of Human Resources’ regulations in the service of the State of California, and that all items shown were for the official business of the State of California.

2 One has to wonder why Mathur has not halted this practice, since it is clearly indefensible, particularly in a financial institution. Mathur may be the reason this dodgy procedure was dreamed up in the first place. Mathur has had six separate instances of failing to file state-mandated disclosure forms on time. both personal conflict of interest documents and campaign finance filings. She was fined four times. At least once, her late conflict of interest consisted entirely of blank entires (note that that is an entirely plausible submission). The fact that Mathur seems to have a deep-seated difficulty with processing documents suggests that someone had the not-too-bright idea of helping her by filing forms on her behalf, and if the staff provided that service to her, they’d have to do it for all other board members.

3 Priya Mathur, no doubt, if pressed, will try to defend this practice by claiming no board member was over-reimbursed. First, it would take a huge forensic exercise to determine if that were true, since there is no good reason to trust an institution that would put this scheme in place. Second, it isn’t necessary for CalPERS to have actually overpaid a board member for the institution to have leverage over them. All that has to be the case is for that the board member to be unable to prove that he was overpaid. In other words, it’s not sufficient for a board member to check every payment received and make sure it isn’t higher than what he submitted. He would have to retain all the backup documentation, for years, to be able to show that the amount he eventually received added up to expenses he could prove he incurred. How many board members do you think were that meticulous?

4 For instance, a few years ago, a small check to my cat sitter wound up instead in an envelope to Cigna with a payment coupon calling for much larger amount. Not only did Cigna process the payment, but it was more disconcerting that my bank had no trouble sending money to Cigna when the check didn’t have “Cigna” anywhere on it. Banking experts advised me that bulk processing of checks is so highly automated that this is a very common outcome.

California Travel Reimbursement Expense Form
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24 comments

  1. Chris Tobe

    At KRS trustees did not get to travel, it was all staff going overseas to Private Equity boondogles, and this was all secret. This calls for an audit of all travel of trustees and staff to be presented to the staff. However, I am most concerned with travel expenses board, entertainment not on the travel vouchers paid for by Private Equity and hedge funds.

  2. Clive

    No organisation that I have ever encountered would tolerate this kind of practice. Just to give an example, I am treasurer of a small charity which is regulated (here in the UK by the Charity Commission). I cannot pay expenses to reimburse other committee members (such as for travelling expenses, catering for membership events, that kind of trivial sounding costs) without a receipt. The Charity Commission if they audited us would raise a red flag and would subject the charity to the threat of deregistration.

    The charity has an income of less than £20,000 a year and assets of less than £30,000.

    CalPERS is, no exaggeration, several orders of magnitude greater in every measure you can think of.

    And yet it behaves in a way which would get your typical county fair organisation blackballed if it behaved in the same way.

    1. Jim Haygood

      If Mr Trump would kindly sign a couple of dozen blank executive orders for us, you and I could make big changes in this country, Clive.

    2. EoH

      Ditto. Pre-signing any blank form is grossly negligent. Pre-signing a blank expense form is so reckless, it becomes a candidate for Ripley’s Believe It Or Not.

      This is ordinarily something for which the CFO would ultimately be responsible. If that’s true at CalPERS, it would explain the board chair and CEO’s desire to have such a compromised appointee in that office. It helps ensure that no one would rock the boat. It also helps keep board members entirely dependent on good relations with staff.

      The wonder is that no board member, CFO or senior accountant raised concerns about this curious practice before. If that’s how this staff treats common expense reporting processes, how well does it organize more arcane investment processes?

      The California legislature needs to sharpen its scythe, grease the wheels on the tumbrel, and start a thorough investigation of this wayward institution, from the board on down.

    3. Conrad

      Anyone with even the slightest sense of proper business practice would see this as unacceptable. And yet how many CALPERs staff and Board members have seen this policy of ‘Signature only please. No date.’ as just fine?
      It’s as though the obvious problems this invites don’t register at all. Which means the people involved are all either irredeemably thick; hopelessly naive or outright fraudsters (or some combination of the three).

      What’s next? Backdated bonuses?

  3. Jesper

    Re-imbursements of valid expenses are usually not subject to income-tax but without supporting documentation showing what was re-imbursed who can tell if it was expense, salary or benefit in kind?
    If the receipts can’t be found then maybe there can be a claim of systematic under-reporting of taxable income to the IRS?

    1. Yves Smith Post author

      The expense forms do have to be have receipts attached when submitted. California adheres to IRS rules on required documentation.

  4. diptherio

    It’s almost comical, it’s all so inept and blatant. Seems obvious that we need a full-on housecleaning. Get rid of all of them: staff and board….except the newbies, of course, they can stay.

    You’ve got one confusing sentence in there that’s probably a typo of some sort:

    Brown signed them in front of staff before saying she wanted to look at them some more and took the folder with the signed copies with her. She did not return them. David Miller says he did not turn in any unsigned forms either.

    …should that be “signed forms,” or did you intend the double-negative?

  5. shinola

    I’ve read most of the calpers articles Yves has posted here (out of morbid curiosity I suppose) but this one takes the cake.

    I previously assumed that the board’s questionable antics were due to “outside” corruption i.e. bribes, kick-backs and/or promises of future lucrative employment by financial firms eager to “earn” fees from handling calpers money.

    Now it appears that some board members just want to steal directly form the fund.

    Is it possible that calpers maintains some sort of secret files with “dirt” on state politicians that causes said pol’s to be oblivious to the obvious & outlandish abusive behavior exhibited by the board?

    I know that sounds rather “foily” but there must be some explanation other than gross incompetence…

  6. voteforno6

    I’ve done quite a bit of travelling on the government dime. Filling out expense reports can be a bit of a hassle. In this case, the staffers were probably doing this for the Board members – they might have only had to turn in their receipts and sign the forms. The staffers probably started doing this because dealing with those board members was quite a pain – that being said, I have a hard time understanding how this saved them much, if any, time. Even if that’s all true, this is the exact wrong way to go about doing this, simply because it can be so easily abused. It’s possible that someone has been getting away with something for a while now, and that’s led to a false sense of confidence. I’ve seen the government audit travel expenses going back years, and get somebody that way. It’s probably easier that way, as there’s a well-established pattern by that point.

  7. EoH

    I don’t see this as intentional financial crime – although this kind of process makes that easier to do – so much as intentionally bad processes. These appear to be seemingly cheap, easy workarounds – we’re all friends here, aren’t we? – that avoid addressing underlying problems, and avoid the problem solving, networking and change required to fix them.

    The easy way round seems to be the culture that permeates this institution. That it might be or lead to criminal behavior seems not to compute. Given the work they are meant to do, that seems a good reason to relieve the leaders of this group of their public employment.

    CalPERS is well-resourced. It has the potential to have superb board members and highly-qualified staff. It does not. California’s legislature would be wise to fix that. Should they consider it, they should bear in mind that the trendy outsourcing of CalPERS’s work would perpetuate these problems, not fix them.

  8. Tom Stone

    I’m sure Attorney General Becerra will be all over this!
    As soon as he’s done with more important matters like impeaching Donald Trump.

    More seriously, this is typical of how business is done in Sacramento.

  9. ChiGal in Carolina

    Wow, Yves, you just continue knocking it out of the park. How much longer can these sorry excuse for administrators (actually, most administrators I have encountered are pretty sorry excuses) keep their jobs?

  10. The Rev Kev

    OK, so the CalPERS Board Manual actually gives the procedure for pre-signing. I am going with the idea that by having this as standard practice, this hides particularly rotten trees in a forest.

    Individual dodgy claims would tend to stick out in a proper audit by my own reckoning. By having pre-signed form, this would muddy the waters by making all filled forms suspect and increase the difficulty of an audit sorting them out.

    You know, this could be a great opportunity for Brown. If she could only circulate blank sheets with the CalPERS logo at the top to all the board members (with those helpful post-it stickers to sign but not date them) she could fill them in as resignation forms. OK, I can dream, can’t I. You wonder how Brown is taking this.

    I am sure that when she was elected that she never suspected the depths to this particular rabbit-hole. I would think that at this stage that they would seek to have some dodgy work with her signature on it and perhaps these forms that she was presented with are a first attempt. Meanwhile the number of documented felonies for certain members of CalPERS keeps stacking up. Maybe it is time to order in another filing case. This is going to all end in a spectacular explosion of trials and litigations sooner or later.

  11. Sinecure in Sac

    Unbelievable, truly umbelievable that an organization that size with its own legal unit, who need remedial training and maybe even some criminal prosecution, dont seem concerned at all and have allowed that all this time.

  12. JCC

    I started at “the bottom” of today’s posts on CalPERS. This one is most definitely the icing on the cake that matches, in spirit at least, that of Miss Havisham’s Wedding Cake. To quote Dickens in Great Expectations:

    … centre-piece of some kind was in the middle of this cloth; it was so heavily overhung with cobwebs that its form was quite indistinguishable; and, as I looked along the yellow expanse out of which I remember its seeming to grow, like a black fungus, I saw speckle-legged spiders with blotchy bodies run home to it, and running out from it, as if some circumstance of the greatest public importance had just transpired in the spider community.

  13. Medium Rare

    Well done. This is mind blowing. They need to send a team of investigators over there to start digging and tear the place apart. With so many red flags, it would be a real field day.

    The fact that these practices are institutionalized and codified in policy indicates that there is much more going on beneath the surface. A target-rich environment for a fraud investigation, for sure.

  14. Dwain Moore

    In Not Our Brother’s Keeper – The True Adventures of an Extraordinary Man, Dwain learned that the CalPERS public pension – our nation’s largest public pension – where he invested was very corrupt from top to bottom: Fred Buenrostro, the chief executive, pleaded guilty to a conspiracy charge nearly two years ago, admitting he took more than $250,000 in cash and other bribes from his friend and former CalPERS board member Alfred Villalobos. Alfred Villalobos, who killed himself in 2015 after it was discovered that he was looking at up to 30 years in prison for his role in the CalPERS bribery scandal, Alfred Villalobos committed suicide weeks before he was scheduled to go on trial because he funded investments to the private equity firms he represented. Dwain learned that in May 2016 the former CalPERS chief executive was sentenced to prison in a bribery scandal.

    Dwain’s brother Dathan – who at the time allegedly had a relationship with either the CalPERS manager in the refund section, Julia Watson, or another CalPERS representative – easily solicited their cooperation to embezzle Dwain’s entire CalPERS pension. Dathan also mismanaged all of Dwain’s several properties, and deflated his numerous bank accounts – total assets of over 2 million dollars squandered – and Dwain was left penniless upon his parole from prison.

    How could a former state governmental employee like Dwain find justice and win his justice against a corrupt multi-billion dollar CalPERS who collaborated with his brother, who used his relationship with CalPERS staff, and his position as a ranking state governmental employee, to embezzle Dwain’s entire pension. Dwain learned with penalties and interest, it would take several hundred thousand dollars to reimburse.

  15. Dwain Moore

    Not Our Brother’s Keeper -The True Adventures of an Extraordinary Man, will be published in August 2018.

  16. vlade

    Hmm. Signing undated white sheets of paper is not a great practice, unless one has a full directors indemnity insurance ;) (I’d like to know whether CalPers Board does – Margaret should known?)

    That said, I had seen a simlar practice with scanned signatures, although in general I believe there were policy restrictions on what those could be used for, and all of those included “cannot be used for any economic-impact documents” sort of caveat (so it could be used for a letter sent on behalf the CEO to shareholders or complainers, but could not be used to sign his travel expenses. Usually, the job to forge that signature fell to his/her PA).

    1. Yves Smith Post author

      Funny you should ask…Brown has been looking into that. The coverage looks pretty skimpy. My recollection is $1.5 million per incident, not per member per incident! And it does not cover gross negligence, and it sure looks like gross negligence to me and pretty much everyone who has seen the photos.

  17. fries

    At a time where electronic signatures that are legally valid are easily and cheaply had (I.e. DocuSign) there is absolutely no need for pre-signing forms. Totally agree CalPERs process is ripe for fraud.

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