An Omaha Public Schools board member wants the district to seek an independent investigation to determine whether the district can recover legal damages over mismanagement of its troubled pension fund.
Lou Ann Goding believes the school board has a fiduciary responsibility to explore whether any professional firms or individuals have legal liability for their roles in creation of the fund’s $800 million-plus shortfall, which was the subject of a World-Herald investigation earlier this year.
“Providing the public and all stakeholders with an independent report would show taxpayers, our staff and retirees we have fulfilled our fiduciary responsibility in attempting to protect them and recapture all funds lost possible,” Goding said in an email to OPS Superintendent Cheryl Logan and other district leaders.
However, Goding hasn’t been able to get district leaders to support launching an investigation into the actions of the Omaha School Employees Retirement System, or OSERS. School board members have declined to even put the issue up for debate.
Logan declined to be interviewed on why she’s not supporting a district investigation. But in an email to Goding, she suggested that the ongoing U.S. Department of Justice investigation launched in the wake of the newspaper’s series makes a district investigation unnecessary.
“With an active DOJ investigation, the federal government is conducting a full examination of OSERS transactions,” she wrote to Goding.
Only one OPS board member agreed to comment on the issue. Ben Perlman said such an investigation could be both expensive and messy.
The cost of such an investigation has been estimated at up to $1 million. And it would potentially involve examining the actions of current and former board personnel, as well as the law firm that has long served as outside counsel to the school district.
David Karnes, an Omaha attorney who has discussed the potential for recovery litigation with district officials, and other legal experts say it’s doubtful the federal investigation would give the district the information and documentation it would need to consider proceeding with litigation. The federal probe’s scope is unknown, and it’s unlikely the full details will ever be released publicly.
There is also precedent for conducting such an investigation and bid for recovery in the wake of a pension scandal. The City of San Diego just over a decade ago recovered at least $13 million in litigation with actuarial, law and accounting firms that had a role in leaving the city’s pension system woefully underfunded.
The debate comes in the wake of a World-Herald investigation earlier this year that revealed mismanagement and bad investment decisions by OSERS that cost the school district hundreds of millions of dollars.
The paper revealed cozy relationships between OSERS leaders and the firms they did business with and potential conflicts of interest related to the fund’s longtime primary adviser, Connecticut-based Atlantic Asset Management.
Atlantic persuaded the OSERS trustees — largely made up of school district personnel — to invest more than half the fund’s $1.2 billion in assets directly with Atlantic or with other firms tied to Atlantic. Often what Atlantic pitched were types of investments in which it had no prior experience, and the advising firm partnered with another firm to sell the investment to OSERS and share in the fees.
The paper’s investigation also revealed that after OSERS — on the advice of Atlantic — pulled a large portion of its portfolio out of stocks in the wake of the 2008 market crash, the fund’s chief administrator and trustees did not follow proper procedures in choosing new investments for the money.
OSERS guidelines called for using an outside consultant to vet new investments and for trustees to interview multiple candidates, but nearly all the money was invested in exotic investments offered up by firms OSERS was already doing business with, including Atlantic. Many of the investments proved big losers.
The World-Herald calculated that bad decisions and mismanagement by OSERS officials cost the pension fund some $500 million, a figure that grows each year as the fund remains locked into millions of dollars in poor investments. The huge shortfall is now forcing OPS and its taxpayers to make tens of millions of dollars in extra annual payments to bring the fund back to solvency.
In examining potential liability for losses, Atlantic would certainly be among the firms OPS could seek to recover from. However, that effort could be hampered by the fact the firm is now defunct.
Atlantic’s principal owners sold the firm in 2015. The new owners were fronts for crooks who immediately defrauded OSERS out of more than $16 million through a bogus bond scheme. After those behind the theft were indicted, the firm went into receivership and was dissolved.
Legal experts say it’s conceivable OSERS could still seek recovery from Atlantic’s former owners or the former firm’s insurance carrier. OSERS already collected a $250,000 settlement from an Atlantic insurer related to the fraud, as well as $173,000 from Atlantic’s dissolution. But this potential recovery would go beyond the fraud case to examine the hundreds of millions of other investments the firm sold to OSERS.
A key question would be whether Atlantic officials offered full financial disclosures in its dealings with OSERS, something only a thorough investigation could determine. It would also need to be determined whether the previous settlement with the Atlantic insurer absolves the firm from being sued for any other wrongdoing.
In addition, OSERS did business with numerous other professional firms whose actions could be explored for possible liability in the district’s losses.
The pension fund contracted with a second investment advising firm for reviews on how investments were performing. OSERS also contracted with an actuarial firm, had its finances audited annually by an accounting firm, and received legal services from the school district’s outside counsel. Questions would include whether the oversight firms were raising red flags when they should have.
It’s also possible recovery could be sought related to actions of OSERS trustees themselves. It’s unclear whether trustees in their official capacities were covered by insurance.
Goding said in an interview she was not at liberty to discuss her push to explore recovery of OSERS funds.
Goding had served on the OSERS trustees beginning in 2013, ultimately helping to make district officials aware of the pension fund’s mismanagement and leading the Legislature in 2016 to essentially fire the trustees as investors of OSERS funds. Given the current federal investigation of OSERS and her role on the board of trustees, she said she’s been advised not to publicly discuss OSERS matters.
However, at the start of a July 15 school board meeting, Goding announced she had requested an item related to OSERS and the board’s fiduciary responsibility to be placed on the agenda. She asked board members to join her in making the request. No one responded.
After the meeting, The World-Herald made public records requests to the district seeking to learn more about what Goding was proposing. Records produced, and subsequent interviews, show Goding’s push for an investigation had been going on for months.
Karnes, a former U.S. senator for Nebraska, said that when he read The World-Herald’s series earlier this year, he was concerned about the huge loss of public funds.
“As a former public official concerned about taxpayers, stakeholders, the citizens of Omaha and OPS, I was curious what steps might be taken,” he said in an interview. He wondered about whether there was a way to take legal action against “bad actors” and recapture lost funds.
Karnes knew Goding, so he contacted her. As an accountant, Goding, too, was concerned about whether there was potential for recovery, and believed the board had an obligation to pensioners and taxpayers to look into it.
Karnes told Goding that his law firm, Kutak Rock, has a division in its Phoenix-area office with expertise in pension law. Kutak attorney Marc Lieberman subsequently was asked to review the newspaper’s series.
Lieberman said he thought there was potential to seek recovery from OSERS advisers and other professional firms it did business with. However, the newspaper’s reports could not be used as a legal basis for seeking recovery. The findings would need to be legally affirmed and documented.
That led to an April 9 meeting in Omaha of Karnes, Lieberman, Goding and Superintendent Logan on the possibility of the district initiating a legal investigation into what happened at OSERS.
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Karnes said his firm was interested in being considered for the investigative job. But it was also understood that if the district decided to pursue the matter, the work would be put out to bid to any interested firms.
In the meeting, Lieberman shared information on San Diego’s efforts to recover lost funds after a pension scandal in the early 2000s. The circumstances in San Diego differed, as the wrongdoing discovered didn’t relate to investments but to intentionally misleading financial statements that covered up the fund’s huge shortfall.
The total amount San Diego collected is difficult to determine because the various claims were settled out of court.
But published reports indicate the city received at least $13.4 million in settlements with law firms, an actuary and others. As is typical in such cases, the actual payments came from the firms’ liability insurance carriers.
In addition, the city agreed to pay $130 million into the pension fund to address previous underpayments that resulted from the misleading statements.
Lieberman estimated that if OPS took up an investigation, it would take six months to a year and cost up to $1 million. After the results of the investigation were provided, the board could then decide whether to engage another firm to initiate litigation seeking recovery. Separating the litigation role would help ensure an independent investigation. Lieberman said Kutak had no interest in pursuing any of the legal claims.
Karnes said given that OPS and all other school districts are creatures of the state, it’s possible any firm investigating OSERS could seek subpoena power from the State Attorney General’s Office. That could allow the investigator to get testimony and documents unavailable to the newspaper.
Logan’s meeting with Karnes and Lieberman later led to a second meeting April 23, this time with Marque Snow, president of the school board, and Shavonna Holman, board vice president.
But from there, the proposal seemed to die.
On June 17, Goding asked Snow, who as president officially sets the board agenda, to set the investigation proposal for the July 15 board meeting. On July 2, she made the same request in an email to both Snow and Logan.
In her July email, Goding expressed concern that if the district waits too long, there could be statute of limitation issues that would bar recovery from some parties.
“Time is of the essence,” Goding wrote.
When the district leaders declined to put the issue on the agenda, Goding then brought it up publicly at the July 15 meeting. Even if the president is opposed, an item can be added to the district agenda if three board members agree. Goding asked board members that night to contact her if they would support it.
Her request was greeted by silence. There are still no indications any other board members support an investigation.
Given board members’ silence on the issue, it’s difficult to discern the exact reasons for their opposition.
Perlman, the one board member who did agree to speak after all were contacted by The World-Herald last week, cited as his primary reason the fact that Logan and the two other board members who heard the proposal are opposed to it. He said he has not been personally briefed on it. Without the support of district administration, he said, it’s unlikely to pass.
Logan declined to be interviewed. The district instead issued a statement noting the DOJ investigation and saying the district was cooperating with it.
Logan similarly cited the investigation in a July 3 email to Goding and Snow. She also noted that OSERS “is currently suing U.S. Bank to recover from one of those losses.”
The pending suit against U.S. Bank is limited in scope, seeking recovery from the bank that served as trustee on the fraudulent bonds. The suit has nothing to do with the actions of any of the firms OSERS directly did business with.
Perlman, who works as a prosecutor in Sarpy County, agreed it’s questionable the district could rely on the federal probe as a basis for recovery of lost funds. “That’s a fair point,” he said.
Nonetheless, Perlman said he at this point doesn’t feel he has enough information to launch an investigation.
The investigation would also be costly, he said, and current and former school board members and OSERS trustees could be subjects of the investigation. He said that includes Goding herself, who after joining the trustees did not immediately recognize the problems and backed some of the questionable investments.
“I appreciate that Lou Ann threw up the red flag and put a stop to this,” Perlman said. “Can she unwittingly end up on the wrong side of a lawsuit because of her desire to have a lawsuit?”
The request for the investigation could also be politically sensitive within the district for another reason: It would potentially include looking into the work of longtime OPS legal counsel Baird Holm. The Omaha law firm, which has done legal work for the district since at least the 1970s, handled matters related to OSERS.
In fact, in Logan’s July 3 email, she calls what Karnes and Lieberman proposed in the April 9 meeting “an independent investigation of our outside legal counsel” — an apparent reference to Baird Holm.
Karnes said Baird Holm was never specifically mentioned in the meeting. The only discussion was a general one on the types of professional firms the district could potentially seek recovery from, among them law firms.
“We weren’t targeting anybody at all,” Karnes said. “We never had those discussions with Cheryl or Marque or anyone.”
Given the amount recovered in the San Diego litigation, it’s fair to question whether an investigation would be financially worth pursuing. If the district were to recover similar amounts, it would still pale in comparison to OSERS losses.
The cost of the investigation — as well as the contingency fees to attorneys that would be paid out of any legal settlement — would have to be weighed against potential recovery, Karnes agreed. Conversely, the potential for recovery also can’t be known unless what happened at OSERS is formally investigated.
Karnes said in his conversations with Goding, her support for an investigation is based more on principle than dollars.
“Her concern was not so much in recovering money,” he said. “If this (pension shortfall) is going to be a problem down the road, we owe it to the taxpayers and citizens of OPS to do a complete investigation.”