SECRETS of the REGENTS – The Mercer Affair

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
Schwartz@physics.berkeley.edu                                       March 3, 2009  


Here is a sorry tale of misconduct and illegal action involving a number of officials at the very top of the University administration. It starts off with a classic case of conflict of interest involving the Office of the Treasurer. This is compounded with an attempt at whitewash and an unlawful secret meeting of The Regents. A whistleblower complaint is filed and the resulting investigation turns out to be just another layer of coverup, disgracing still more branches of the University of California Office of the President (UCOP). The first part of this paper lays out the documentary history; then I summarize some relevant law, and finally draw conclusions and offer recommendations for corrective action.

Note: If I identify something as Document X1, for example, it will be posted on my web site at http://socrates.berkeley.edu/~schwrtz/Mercer/DocumentX1.pdf

I. The Secret Meeting

     A meeting of the Regents’ Committee on Investments was scheduled for September 17, 2008, and the official Notice included the following:

Agenda – Closed Session1

         Action     Approval of the Minutes of the Meeting of March 19, 2008
I1(X) Action     Appointment of Regents General Investment Consultant
…..
1 Closed session Statute Citation: Investment matters [Education Code §92032(b)(4)]

     On September 6, I sent the following email to Anne Shaw, the Associate Secretary of The Regents:

Subject: COMPLAINT Re: Committee on Investment meeting

I have looked at the published agenda for the September 17, 2008, meeting of the regents' Committee on Investments.  The scheduled Closed Session lists the item,
"I1(X) Action      Appointment of Regents General Investment Consultant" with the footnote,
"Closed session Statute Citation: Investment matters [Education Code §92032(b)(4)]"

This appears to me to be an improper and illegal attempt to conceal from public scrutiny business of The Regents which ought to be conducted in Open Session.  Please forward this complaint to the appropriate authorities at UCOP;  and please keep me posted on any further developments.  Thank you,

     She replied by email, that same day, saying “okay” to my requests. However, I never received any further response to my complaint about this closed meeting.  

     A day or two after the meeting I found this information posted on the Regents’ web site, under “Approved Actions” coming from the Committee on Investments:

1. APPOINTMENT OF REGENTS GENERAL INVESTMENT CONSULTANT
The Committee recommends the appointment of Mercer Investment Consulting, Inc. to serve as the Regents’ Generalist Investment Consultant in connection with ongoing review of the University of California’s Investment Program. The contract will have a term of three years.

II. Preliminary Inquiry

     Sheryl Vacca was appointed by The Regents in September 2007 to be the University’s Senior Vice President and Chief Compliance and Audit Officer. This was a new position created after the embarrassing scandals over executive compensation a few years ago. She heads the Office of Ethics, Compliance & Audit Services at UCOP. One of the responsibilities of that Office is to receive and investigate whistleblower complaints, following University policy and state law. I sent her the following preliminary inquiry in an email on September 27.

I wonder if you can give me some guidance, or direct me to relevant reading, on the following concern as it may relate to the University of California.

The issue of excessive executive compensation is frequently discussed in relation to many large institutions in our society. One aspect of this which has been noted is the arrangement where an external consulting firm is brought in to advise the top management on setting appropriate compensation scales; and then the well paid managers may hire that same consulting firm for other jobs.  Such situations readily give the appearance, at least, of involving a sort of conflict of interest.

What standards and procedures are there to avoid such troubles?    Sincerely,

     SVP Vacca replied on October 1 with an informative email (the complete text is posted as Document X1), which acknowledged the serious nature of the issue I had raised and indicated that, for the circumstances I had in mind, the greater responsibility for avoiding such a conflict of interest would lie with the University rather than with the external consulting firm.


III. Whistleblower Complaint

     On October 2, 2008, I sent the following email to SVP Vacca:

Thank you for that response to my original inquiry.  It now appears sensible for me to present the specific situation which has caught my attention (see the attached file Mercer-UCOT.doc) and ask you what opinion you have about this.

     The following is that attached file, my Whistleblower Complaint.
- - - - - - - - -
October 2, 2008
TO: University of California Senior Vice President Sheryl Vacca
FROM: Professor Emeritus Charles Schwartz, UC Berkeley
RE: The matter of choosing a General Investment Consultant for The Regents.

Background

In 2001 The Regents hired Wilshire Associates as their general outside investment consultant, in a manner that caused some concerns about the process.

In 2004, when the Wilshire contract had expired, an RFP was issued for a new investment consultant; and in July 2004 the Regents’ Committee on Investments approved the choice of the firm Richards & Tierney.  It should be noted, in particular, that the process of making the selection from the many firms submitting proposals was assigned to a group of senior administrators and an outside advisor, none of whom was directly attached to the Office of the Treasurer. [See item 602 for the July 14, 2004, meeting of the Committee on Investments.]

In January 2008 a new RFP was issued for a successor firm to be The Regents’ General Investment Consultant. At their September meeting the Regents’ Committee on Investments chose the firm  Mercer Investment Consulting Inc. for this job; and the full Board ratified that choice.

Concerns

We learn about the selection procedure from the recent RFP (page 5).
“Proposals will undergo an evaluation process conducted by staff within the Office of the Treasurer of The Regents of the University of California. Those Investment Consultants, which, on the basis of the submitted proposals, the University believes to meet best the University’s requirements for the delivery of the services sought under this RFP, will be considered finalist candidates and may be visited and interviewed by the University’s investment staff. Based on its evaluation of the proposals, the University staff could determine that there is only one finalist or that there are no finalists.

“The University investment staff, in its exclusive discretion, shall select such proposals that it considers to be in the best interests of the University. While cost is a consideration, the University reserves the right to award the resulting contract(s) on the basis of all relevant considerations and the University’s overall evaluation of each Investment Consultant’s ability to meet the University’s needs. …”

Thus, the selection process this time was conducted entirely by people inside the Office of the Treasurer, contrary to the procedure followed last time.

The appearance of a potential conflict of interest, or other impropriety, comes from the fact that Mercer company has been central to the University’s review and restructuring of executive compensation policies and practices over recent years.

In addition to that general involvement of Mercer, we find that Mercer Investment Consulting, Inc. has been specifically involved in the design of the Annual Incentive Program for the officers and staff of the Office of the Treasurer. [See items I2, I3 on the agenda of the May 7, 2008, meeting of the Committee on Investments.]

To put some quantitative meat on this qualitative narrative, note that the most recent publication of data about UC compensation practices (issued by UCOP July 2008) shows that the four highest paid executives at the UC Office of the President (exceeding even the President of the University for calendar year 2007) are all leaders in the Office of the Treasurer.

There is one more item of questionable procedure. The September 17, 2008, meeting of the Committee on Investments, where they took action on “Appointment of Regents General Investment Consultant” was held as a Closed Session.  This is contrary to their previous conduct for such considerations.  That was, in my (not inexperienced) opinion, a violation of the state’s Open Meetings Law.  I did register a formal protest about this excessive secrecy in advance of that meeting but have received no reply from any responsible official.

- - - - - - - - -

     On October 30 I received a letter from John Lohse, Director of Investigations in SVP Vacca’s office, acknowledging my letter (above). He said that they were looking into these matters that they were also consulting with the Office of the General Counsel of The Regents (OGC). (The text of his letter is posted as Document X2.)

     In a subsequent email, on December 12, Mr. Lohse wrote:

In my October 30, 2008 letter, I informed you that we had asked the Office of General Counsel for assistance in examining your concerns about the process of choosing a general investment consultant for The Regents of the University of California.  In particular, we asked the Office of General Counsel to research the circumstances of the appointment of Mercer in a closed session of The Regents Committee on Investments.  I wanted to let you know that this review of the involved issues is still underway.  I will communicate with you as soon as we have an answer to your question.  I appreciate very much your understanding and patience.  Sincerely,

     On February 9, 2009, I wrote to Lohse and Vacca as follows:

It is now over 4 months since I originally filed my whistleblower complaint, indicating potential conflicts of interest and also an illegal closed meeting of the regents - all related to the hiring of Mercer as the University's investment consultant.  If the Office of the General Counsel is still dragging its feet in responding to your request for assistance in this investigation, perhaps you should file your report based upon what you have learned so far.    Sincerely,

IV. Official Report of Investigation

     On February 23, 2009, I received this email from Mr. Lohse:

Please find attached a letter that summarizes our inquiry into the issues that you identified concerning the process of selecting the Regents’ General Investment Consultant in September 2008.  I have signed this letter on behalf of Senior Vice President Vacca as she is currently out of the office.  Thank you for your understanding and patience during the research into your questions.  Sincerely,

     That complete letter is posted as Document X3. Here are the official conclusions of their investigations.

The Conflict of Interest Issue
Our investigation revealed that the Office of the Treasurer of The Regents identified the possibility of a conflict of interest or appearance of a conflict once Mercer IC became a finalist in the selection process last summer.  That office appropriately consulted with the Office of the General Counsel and requested that Mercer propose steps to address the issue.  On July 7, 2008, Mercer sent a letter offering to undertake several steps which we believe adequately addressed any conflict of interest or appearance issues. We have verified that the promised steps were put into effect and were also advised that the Office of the Treasurer plans to evaluate the efficacy of those steps periodically.  A copy of the July 7 letter is attached for your reference.

The Open Meeting Act Issue
The basis for designating the September 17, 2008 Committee on Investments meeting as a closed session was listed as California Education Code § 92032(b) (4): matters involving investments. This determination was considered appropriate at the time it was made, prior to the meeting.  However, we have subsequently reviewed the draft minutes for that meeting and believe that in this instance, the discussion which actually took place went in a direction which arguably should be publicly disclosed.  It should be noted that, after that meeting, the full Board of Regents took action on the recommendation of the Committee on Investments in open session.

We are therefore providing you a copy of the draft September 17, 2008 meeting minutes. We must stress that at this point the minutes have not yet been approved by the Committee on Investments.  We expect that Committee to take action on this draft at its next meeting following the one set for tomorrow.

     The July 7 letter from Mercer, referred to above, is posted as Document X4 and the draft minutes of the September 17 meeting is posted as Document X5.

V. California Law on Open Meetings

     The principal law covering meetings of statewide agencies in California is called the Bagley-Keene Open Meeting Act, found in the state’s Government Code starting at Section 11120.  Here are some selected parts which are most relevant to us here.

§11120.  It is the public policy of this state that public agencies exist to aid in the conduct of the people's business and the proceedings of public agencies be conducted openly so that the public may remain informed.
   In enacting this article the Legislature finds and declares that it is the intent of the law that actions of state agencies be taken openly and that their deliberation be conducted openly.
   The people of this state do not yield their sovereignty to the agencies which serve them.  The people, in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know.  The people insist on remaining informed so that they may retain control over the instruments they have created.

§11121.9.  Each state body shall provide a copy of this article to each member of the state body upon his or her appointment to membership or assumption of office.

§11127.  Each provision of this article shall apply to every state body unless the body is specifically excepted from that provision by law or is covered by any other conflicting provision of law.

§11130.  (a) The Attorney General, the district attorney, or any interested person may commence an action by mandamus, injunction, or declaratory relief for the purpose of stopping or preventing violations or threatened violations of this article or to …
   (b) The court in its discretion may, upon a judgment of a violation of Section 11126, order the state body to tape record its closed sessions and preserve the tape recordings for the period and under the terms of security and confidentiality the court deems appropriate.

§11130.7.  Each member of a state body who attends a meeting of that body in violation of any provision of this article, and where the member intends to deprive the public of information to which the member knows or has reason to know the public is entitled under this article, is guilty of a misdemeanor.

     The Regents of the University of California, the Board and its Committees, are subject to this Open Meeting Law, as particularly set forth in the state’s Education Code, starting at Section 92020.  The portion relevant to the issue at hand reads:

EC§92032(b) The Regents of the University of California may conduct closed sessions when they meet to consider or discuss any of the following matters: …
   (4) Matters involving the purchase or sale of investments for endowment and pension funds.

     At this point I wish to recite a bit of relevant history.  In 2003 I was one of the plaintiffs in a lawsuit against the UC Regents, which charged that they had violated the Open Meeting Law by misusing Education Code §92032(b)(4) to conduct closed sessions of the Committee on Investments that should have been open meetings. In that case, the closed meetings in question were announced as concerned with investment strategy; and the Regents’ lawyers could make the argument, at least, that decisions about overall investment strategy could be linked to “the purchase or sale of investments” as specified in EC§92032(b)(4). The court rejected that stretch of logic and ruled in our favor. What is astonishing in the current situation is that the University’s lawyers now appear be stretching EC§92032(b)(4) much much farther, so as to cover almost anything that might be called ”Investment matters.”  Furthermore, as noted in my original whistleblower complaint, on the previous occasions when the Regents’ Committee on Investments met to consider the hiring of an external investment consultant, they did so in open session.

VI. Conclusions about Who did What that was Wrong

     There is a range of conclusions, and implied accusations against various parties, that one can reasonably draw from the evidence presented above.

     First, regarding Marie Berggren, Treasurer of The Regents, the most favorable view is that she was surprised, in June 2008, to find Mercer among the finalists for the job of investment consultant and recognized that there might be an appearance of conflict of interest. (For the calendar year 2007, she had received gross earnings from the University amounting to $833,437. Her base pay for that year was $410,000; and so she had much to appreciate from the Annual Incentive Plan, which was designed for her by Mercer as consultant to UC on executive compensation.)  The proper course of action for her to take at that junction would have been either (a) to eliminate Mercer from consideration, or (b) to recuse herself from further participation in the process of selecting the investment consultant.  In fact, she did neither. According to the Reports from the Ethics Office, she met with some lawyer from the OGC and they came up with a creative plan to manage the apparent conflict of interest situation: They pretended that the only potential for conflict lay in the future relations with Mercer, had nothing to do with past connections, and that they could handle this, as described in Mercer’s July 7 letter.

     Next comes Regent Paul Wachter, Chair of the Committee on Investments. He was involved in those discussions with Treasurer Berggren and the UC lawyer about the conflict of interest problem.  He was the person responsible for planning the meeting of his Committee, in September, when the choice of investment consultant would be formally decided. I cannot imagine that it was anyone but he who decided to make that a closed session; my guess was that he wanted to avoid, or at least to minimize, the possibility of some public embarrassment around the apparent conflict of interest situation. It is likely that he consulted with others about this decision (some UC lawyer?, the Chair of the Board, Regent Richard Blum?) There is need for further investigation here. (Note that Vacca’s report avoids mention of any regent.)

     Regarding other members of The Regents. The now released minutes of that closed session of the Committee on Investments on September 17, 2008, identifies the following as present for that 5-minute meeting: Regents Blum, De La Peña, Pattiz, Schilling, Wachter, and Yudof.  A number of other high level UC personages were also present.  The minutes show that nobody made any comment or asked any question about why this was being held as a closed meeting.  There was some discussion about the conflict of interest issue – with an outside advisor, not any UC person, raising questions.  If we look at the Government Code Sections 11121.9 and 11130.7 cited above, it is clear that all of those regents have a duty and a liability regarding possible abuse of Closed Sessions. Their silence implies complicity.

     My overall conclusion is that there was a serious conflict of interest problem; I just don’t know how bad it really was. There was an early attempt, in June, to whitewash it. There was a subsequent attempt to cover it all up with the secret meeting in September. That arrangement was blatantly unlawful and a number of top University officials are implicated. The Office of the General Counsel is deeply involved in every part of this sad story; but that is an old conundrum – Does the General Counsel of The Regents serve the University, serve the Law and the People of California, or serve the members of the Board of Regents in whatever they wish to do?

     Saddest of all is the disgrace that falls upon the Office of Ethics for their awful attempt to cover up this whole mess after receiving my whistleblower complaint.

VII. Recommendations for Internal Remedies

     What we have here is a big stinking scandal. An initial problem, or perhaps just a simple mistake, has grown into a cancerous mess because officials are more concerned with covering up bad things rather than airing them and fixing them.  I recommend that if they have any respect for the integrity and public esteem of the University of California, The Regents will initiate these three steps:

A.    Select an outside, independent and competent party to conduct a thorough investigation of everything reported and implied above.

B.    Arrange for some outside, independent and competent party to provide appropriate education for members of the Board of Regents and other high level UC administrators about their legal and ethical responsibilities.

C.    Resume tape recording of all Closed Sessions of the Regents’ meetings, which was their custom until they lost the lawsuit mentioned earlier.  This practice should help remind them of their obligations to public accountability.