CalPERS’ $11 million legal payment scrutinized

June 28, 2011

An $11 million bill for legal fees associated with an internal review of the California Public Employee’s Retirement System (CalPERS) is drawing criticism. LATIMES

CalPERS, the nation’s largest public pension fund which oversees $232 billion, paid a Washington, D.C. law firm and its advisors the $11 million sum following a legal review which uncovered evidence to support allegations of corruption and bribery involving alleged insider dealings, according to the Los Angeles Times which made CalPERS disclose the payment.

CalPERS says the findings from the 18-month review by Steptoe & Johnson allowed them to negotiate $215 million in fee reductions from private equity investment managers who handle much of its assets.

While CalPERS chief investment officer told the LA Times the fees were worth every penny, some of the fund’s own directors are scrutinizing the payment including state Controller John Chiang and state Treasurer Bill Lockyer who are calling for a full accounting of every dollar spent and a change in how CalPERS approves contracts where spending is in excess of $1 million.

Some critics argue CalPERS should have elicited the help of the state attorney general’s office rather than an East Coast law firm to conduct the internal review.

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Did either of the Seitz brothers or John Wallace have anything to do with it?

At $400 per hour the $11,000,000 audit bill would be 27,500 hours of billed time. At $200 per hour it would be 55,000 hours of billed time. This does seem excessive. An audit of this size and type would typically be ten to fifteen auditors working for three weeks on sight and another two at the auditors home base to wrap up the reports. 15 auditors X 5 weeks X 5 days X 8 hours = 3000 man hours. This is why this has raised eyebrows as the billing is for between 27,500 and 55,000 man hours.

Having said this, it can be argued the audit paid for itself since it cost $11 million and it supposedly saved $215 million.

…and therein is the rub of the legal system… skim some off the top (or bottom, as the case may be). CalPERS was ripped off by $215M, so the $11M fee looks valuable. Maybe they can pay some firm $500K to find out they only need to pay $2M to the investigators? …and so on?

Go on, take the money and run…. wooooot-wooooo!