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DC Pension Faces Whistleblower Suit Alleging Investment Fee Misreporting, ‘Toxic Culture’
The lawsuit raises questions about how pension funds report fees — and offers a possible reason for DCRB’s staff exodus.
A whistleblower has filed a lawsuit against the District of Columbia Retirement Board alleging that it retaliated against her for saying that the fund wrongly reported investment management fees and was not monitoring private investment agreements.
The lawsuit was filed by Erie Sampson, the fund’s general counsel and ethics counselor, in Washington, D.C. on December 30.
The lawsuit describes a “toxic culture of fear and retaliation” at DCRB and alleged the pension fund had audit and compliance issues, which could be to blame for its staff exodus. The suit also raises questions about how pension funds more broadly report investment fees.
The Washington Post first reported on the lawsuit on Sunday. Carla Brown, who is the attorney representing Sampson, was not immediately available for comment.
“DCRB will aggressively defend itself in court against the meritless lawsuit and has cooperated fully with the investigation,” the retirement board said in a statement issued late Tuesday.
In the complaint, Sampson alleged that she attempted to address longstanding compliance problems at the fund, specifically inaccurate annual financial reporting, “gross understatement” of investment management fees, a failure to monitor investment agreements, and insufficient HR oversight. Sampson said she raised these issues to the board and executives and eventually filed a whistleblower complaint against the fund. During this time, Sampson had also received multiple federal subpoenas, which she had disclosed to the fund.
The Washington Post reported Sunday that the subpoenas mentioned in Sampson’s lawsuit were related to a criminal investigation that sought records on the fund’s financial transactions, including its payments to investment managers and consultants. Sampson alleges in her lawsuit that following her disclosure of federal subpoenas, she faced retaliation and defamation from DCRB staff.
According to the lawsuit, Sampson has been placed on leave from the fund. She is suing DCRB for whistleblower retaliation and negligence. The suit also names the board and its chairman, Joseph Clark, as plaintiffs. She is seeking up to $10 million in compensatory damages.
“DCRB works with its staff and legal counsel to respond appropriately to any governmental inquiry,” the retirement board said in its t statement. “DCRB does not undertake any adverse employment action against employees for assisting DCRB in complying with a governmental inquiry.” The pension fund noted that “there is nothing to indicate” that it is the target of a criminal investigation, and, according to the statement, was asked to not disclose the two subpoenas it received “so as to not impede any investigation.”
Institutional Investor previously reported on staff turnover at the DCRB. In July, the organization’s fourth CIO in as many years, Mark Spindel, stepped down after just a year at the helm. Meanwhile, three different people filled the executive director role in 2021 alone.
The fund has since hired permanent replacements in each role — Gianpiero “JP” Balestrieri is now executive director, while longtime senior investment strategist Patrick Sahm stepped into the CIO role, as II newsletter Essential Allocator previously reported.
December meeting minutes reveal that under its new leadership, DCRB had begun to address the fee and investment process problems. According to the minutes, new investment processes that involve risk and legal compliance reviews earlier on have been established, in an attempt to provide trustees and the board “more informed consent and data for review and approval.”
Meanwhile, in response to a question on the topic, DCRB chief financial officer explained that the investment management fees issue was one of presentation, rather than poor auditing.
Indeed, the DCRB comprehensive annual financial report for fiscal years 2019 and 2020 shows that the fund paid roughly $16.8 million in fees — but that the fund only reported its fees to “traditional investment managers” which included public equity, real assets, and fixed income managers, and “some non-traditional managers.”
“Fees for non-traditional, private market managers are often netted against investment income,” the annual report said. “As a result, those expenses, including performance-based fees, are not included.”
That definition has evolved over time. In 2018, the DCRB reported paying $15.2 million to “traditional investment managers only. Traditional investment managers are those that invest primarily in public equity and fixed income securities,” the CAFR from that year said.
According to Sampson’s lawsuit, though, when she asked the investment team to calculate total management fees, she was first rebuffed, then told that the fees were more like $93 million in total that year.
“The investment fees that DCRB pays are in line with the market and are directly attributable to the strong investment returns DCRB has achieved,” according to the DCRB statement. For the fiscal year ended June 30, the DCRB returned 27 percent, Institutional Investor previously reported. Over the three-year period, the fund returned 10.2 percent net of fees, and over the five-year period, it returned 10.3 percent.
The fee reporting issue is one that pension funds more broadly have been grappling with for years. In 2019, Pennsylvania’s Public Pension Management and Asset Investment Review Commission issued a report on best practices at public pension funds that detailed the disparate ways these funds report fees.
For that report, Ashby Monk, a pension fund researcher, testified that “because much of the compensation data has been buried in fund footnotes, hidden in net asset value calculations, waived away as profit sharing or ignored by pension... the information was thus not reported. Not measured. Not tracked. And not managed.”
The report recommended that pension funds report both gross fee and net of fee returns to show how fees affect performance. The report noted that some funds, including the Pennsylvania Public School Employees’ Retirement System, have only reported returns net of fees.
It also said that pension funds in Louisiana and New Jersey provided a separate report of fee terms, while the Nebraska Investment Council discloses those terms in performance reports prepared by their consultant. CalPERS, CalSTRS, Arizona SRS, the South Carolina Retirement System, and Texas County & District Retirement System also report on carried interest fees, according to the Pennsylvania pension’s report.
This story has been updated to include a statement issued by the DCRB following this story’s publication.