Who Smashed My Piggy Bank? Pension Fraud & How to Fight It

May 2008

IN THIS ISSUE

— When Good Nest Eggs Go Bad: Cases of Pension Fraud
— Protect the Nest: Combating Pension Fraud
— In the next issue

GREETINGS!

Welcome to the May 2008 edition of our newsletter. In this issue, we’ll examine the various motives behind pension fraud, and offer some suggestions for how to detect & prevent it.

WHEN GOOD NEST EGGS GO BAD: CASES OF PENSION FRAUD

As the 20th century came to a close, some of the ideals that made it such a dynamic era of American prosperity seemed to fade away as well. As stalwart companies like Ford, General Motors and multiple airlines struggled, their long-time employees could take comfort in the belief that, after their decades-long careers were at an end, they would have the security of a hardy pension fund to see them through old age.

Right?

Unfortunately, as we have seen in the first years of the 21st century, pension have been a casualty of union battles and cost-cutting measures. But they have also fallen prey to outright fraud.

We have seen several pensions evaporate as an effect of other frauds, as in the case of Enron, where several thousand employees’ once robust retirement savings dwindled to pennies on their investment dollar. This had nothing to do with manipulation of the pension funds themselves, but in other cases the pension is arena of choice for fraudsters. Some, such as one we investigated many years ago, are not terribly complex: an investor openly flouts pension contribution limits, shoveling millions into the tax-deferred retirement vehicles, showing a far less profitable business on paper than in reality. In another instance, a pension fund official steered $65 million in investments to a savings and loan he partially owned, thus profiting from its management.

PROTECT THE NEST: COMBATING PENSION FRAUD

What can be done to prevent employee retirement savings from disappearing? Surprise audits of pension records are always a good idea, but one of the country’s largest public employee retirement programs, the California Public Employee Retirement System (CalPERS) has pushed even further, asking the California legislature to attach criminal penalties to pension fraud, in addition to existing civil remedies, as well as to re-examine the medical examination criteria for employees claiming disability benefits. This latter category is a common source of pension frauds.

There are several other steps you can take that will help you prevent pension fraud, whether the company is large or small. One is to cross-reference the business addresses of investment holdings with employee addresses to determine if any shell companies may be used to embezzle assets by internal employees.

Regarding external investment managers, a review of their disciplinary history with FINRA / NASD is a wise step to take before retaining outside investment help. You can also consult the IRS Form 5500 filings of other pension funds an investment manager has handled to see their annual performance and other details.

IN THE NEXT ISSUE

In the June issue, we’ll focus on various embezzlement schemes, how to detect them and how to create a culture that discourages them from happening.