Federal Judge Calls AFM-EPF Trustees’ Investment Approach “Extraordinarily Risky”

Anyone who still thinks that the crisis at the AFM-EPF was not caused by the mismanagement of our trustees should read the transcript of a recent hearing before the Federal Judge overseeing the Snitzer class action. You can find the complete transcript here. As many of you know, Local 802 members Andy Snitzer and Paul Livant filed a class action lawsuit against the AFM-EPF trustees, charging them with breaches of fiduciary duty. On April 26, the federal judge conducted a hearing on the case, and after that hearing entered an order denying the trustees’ attempt to have the case dismissed.
 
At the hearing, Federal Judge Valerie Caproni called the trustees’ investment approach “extraordinarily risky,” citing outsized bets on emerging markets and private equity. These bets were completely out of line with what peer funds were doing. (Transcript, page 36) The Judge excoriated the trustees for not having standards for evaluating how outside investment managers were doing. The Judge stated that “it was not clear to me that there was any kind of standard,” rather there was simply “a kind of gut feeling that we need to hang in with this manager for a year or two more.” (Transcript, page 13)
 
Judge Caproni concluded: “As fiduciaries, the trustees should have some criteria they use to decide whether active management was actually worth the cost and for deciding to fire active managers who were not doing a good job. Plaintiff [the plan participants] alleges there were no standards and nothing in the defendants' [the trustees] documents demonstrates that there were.” (Transcript, page 42
 
At the hearing it was disclosed that while the trustees were placing risky bets on emerging markets equities, the outside investment managers were making the opposite bets with their own money, divesting their own portfolios of these investments. The AFM-EPF trustees were fully aware of this at the time but still plowed ahead with their risky strategy. (Transcript, page 24)
 
The hearing revealed how the trustees ratcheted up the AFM-EPF’s target investment return from 7.5% to 9% following the 2008 financial crisis. To get those kinds of returns, the trustees took on more and more outsized investment risk. As attorney Steve Schwartz said: “Going from 7 1/2 to 9% is a massive shift... and that is very much like a gambler who is doubling down or tripling down trying to take riskier and riskier bets.” (Transcript, page 20)
 
According to Schwartz, the trustees were advised by their counsel at the time that investment returns were “ugly” and that “there would be a riot” if the plan participants were told the facts. (Transcript, page 27) Contrast this with numerous statements from Ray Hair and Tino Gagliardi that investment performance has been “good.” 
 
Mr. Schwartz also told the Judge that a public statement made by trustee Tino Gagliardi at a meeting of plan participants demonstrated “a complete lack of understanding” of the choices facing trustees in the proper management of the plan’s investments. (Transcript, page 30-31
 
The court hearing reveals a dysfunctional board of trustees that lacks the skills to manage our pension plan’s investments. Counsel for the trustees argued that the trustees were not at fault because they were just following the advice of their outside advisers. But that’s exactly the problem. A board of trustees cannot be a rubber stamp for outside advisers. A board of trustees needs the ability to understand and question the advice they are getting. 

MPS once again calls upon Ray Hair to bring onto the AFM-EPF board new trustees who have the skill sets necessary to do the job properly. Left where they are, the trustees will make the same mistakes over and over, leaving the AFM-EPF in rolling crisis mode permanently into the future.