AFTRA loyalists at the website SAGWatch are not pleased that a light is finally being shone on the questionable investment practices of the AFTRA Retirement Fund.
As I pointed out here earlier this week AFTRA loaned shares it owned to speculators who were betting that American companies would fail and then invested the proceeds of those transactions in an offshore tax haven that was, in turn, investing those monies in mortgage backed securities even as there was information that the real estate market was in trouble. Sure enough AFTRA lost a bundle.
AFTRA started this fight by suing its banker JPMorgan which arranged the financial structures that fell apart. AFTRA has an interesting theory that may or may not have merit – that JPMorgan itself also invested in the same offshore tax haven but was able to get collateral to protect its investment that AFTRA did not get.
AFTRA argues therefore that JPMorgan violated its fiduciary duty to AFTRA by investing alongside of AFTRA. Whether that is a valid claim or not I leave to another day. The question I have raised, based on my review of the detailed brief filed recently by AFTRA’s lawyers, is whether AFTRA trustees properly carried out their fiduciary duty to the beneficiaries of the retirement fund when it put the funds’ assets at risk in these speculative transactions. A second question raised is why American unions are helping short selling speculators bet against the health of American business as well as sending union members’ money into offshore tax havens for further speculation.
The weak tea defense being raised now by the AFTRA crowd is that, well, this was a decision made by “an independent company” not under the control of the union.
Hmm, let’s look a little closer. Who controls the Retirement Plan?
1) no money goes into the fund unless the union bargains for contributions by employers and members;
2) the trustees of the fund are chosen by the union and management and without union trustee agreement no significant decision can be made by the fund;
3) the fund can try to shield itself from claims of fiduciary duty if they hand off decision making about asset allocation to a hired gun from Wall Street but here it turns out that the “securities lending agreement” with JPMorgan that led to the loss of millions of dollars was signed by Shelby Scott, who was co-chair of the retirement plan and a national officer of AFTRA itself and is also a former president of AFTRA. Co-signing for the employer trustees was Dean Ferris, head of labor relations for Fox. The agreement can be found as an exhibit to the original complaint filed by AFTRA’s lawyers.
4) That lending agreement specifically listed the type of security at issue in the lawsuit – medium term notes – as a “Permissible Investment” of AFTRA funds. SAG Watch contends that JPMorgan somehow made a decision to invest in the risky notes issued by a trust set up by the Sigma fund in the Cayman Islands without telling AFTRA, but that does not seem to be the case, and that claim does not appear in the new brief just filed by AFTRA’s lawyers or the original complaint. The lawyers do claim that there were other problems with JPMorgan’s behavior, and as I suggest those may or may not have merit but are not the issue of the day. (These do include a failure to disclose – not about the original MTN investment – but about the later investment by JPMorgan in additional financing for Sigma. This “repo” financing was an attempt, apparently, to help stabilize the troubled Sigma fund.)
Of course, it may very well be the case that if a fund beneficiary were to sue for a violation of fiduciary duty that Ms. Scott would not face personal liability but that hardly settles the main question: why are American unions supporting speculative short sellers and sending union members’ money to offshore tax havens to speculate in our credit markets?