Stock Loan Tiff: 4 Allocators' Case Against Wall Street Firms Advances

It’s a longtime lucrative sideline for Wall Street firms: lend out shares, usually to hedge funds, for shorting and options trades. Often, the shares come from clients. But four pension funds are suing five of those firms, claiming they stiff the retirement programs on fees from the share rentals.

The plaintiffs are the Los Angeles County Employees Retirement Association, Iowa Public Employees’ Retirement System, Orange County Employees Retirement System and Sonoma County Employees’ Retirement Association.

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The pension plans have moved to give their lawsuit class action status, which would mean that many more parties would get money from the investment firms should this challenge win. That would be bad news for the five defendants in the suit: Goldman Sachs, UBS, Morgan Stanley, JPMorgan and Bank of America’s Merrill Lynch.

They moved a step closer to their goal by gaining the recommendation of Manhattan federal magistrate judge Sarah Cave that they get the class action designation. The matter now is before U.S. District Judge Katherine Polk Failla, who must decide whether to grant that status.

The pension programs charge that the five investment firms—their complaint likens the firms to the “five families” that once ruled the New York Mafia scene—collude to wean unjust profits from the share lending. Stock lending by the firms, who are known as prime brokers, has been criticized by the Securities and Exchange Commission, which wants to increase reporting on the activity.

The brokers have denied that they collude and argued that their endeavors enable hedge funds and others to find lesser-known stocks. Plus, they have contended, more reporting would violate the short sellers’ confidentiality.

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Tags: Class Action, Goldman Sachs, Iowa Public Employees' Retirement System, JPMorgan Chase & Co., Los Angeles County Employees Retirement Association (LACERA), Merrill Lynch, Morgan Stanley, Orange County Employees Retirement System, Securities and Exchange Commission, short selling, Sonoma County Employees’ Retirement System, UBS

The $447.15 billion California Public Employees’ Retirement System reported a preliminary 6.1% loss for its investment portfolio for the fiscal year ending June 30, which it blamed on “tumultuous global markets.” While the loss was well below its 6.8% assumed rate of return, the pension giant outperformed its benchmark by 0.9%, according to a news release.

The loss was led by the portfolio’s fixed-income and public equity investments, which lost 14.5% and 13.1% respectively during the fiscal year—nearly in line with their respective benchmarks.

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The fund’s real assets and private equity investments were the pension fund’s best-performing asset classes, returning 24.1% and 21.3% respectively. While the real asset investments fell short of the benchmark’s return of 27.1%, CalPERS’ private equity investments easily beat its benchmark’s return of 8.3%. Despite the high returns, the portfolio ended the year in the red because public market investments make up approximately 79% of the total fund.

“We’ve done a lot of work in recent years to plan and prepare for difficult conditions,” CalPERS CEO Marcie Frost said in a statement. “Despite the market conditions and their impact on our returns, we’re focused on long-term performance and our members can be confident that their retirement is safe and secure.”

CalPERS Preliminary Net Investment Returns for the 2021-22 Fiscal Year Source: California Public Employees Retirement System

The pension fund reported five-, 10-, 20- and 30-year annualized returns of 6.7%, 7.7%, 6.9% and 7.7% respectively, with an estimated overall funded status of 72%. The fund ended the fiscal year valued at $440 billion, but was worth an estimated $447.15 billion as of July 20.

“This is a unique moment in the financial markets, and we’ve seen a deviation from some investing fundamentals,” said CalPERS CIO Nicole Musicco in a statement. “For instance, our traditional diversification strategies were less effective than expected, as we saw both public equity and fixed income assets fall in tandem. But despite a challenging year, we were able to outperform our total fund benchmark by 90 basis points and provide strong returns from our private market asset classes.”

Musicco also noted that as the pension fund implements a new strategic asset allocation it will increase its exposure to private market assets.

Stock Loan Tiff: 4 Allocators’ Case Against Wall Street Firms Advances

CalPERS Blames ‘Tumultuous’ Markets for Preliminary 6.1% Fiscal Year Loss