Calpers CIO’s mysterious exit was preceded by months of torment
First, he was called a Chinese spy. Then he was accused of misleading his board. Yet Ben Meng stayed on as investment chief at California’s mammoth state pension plan. What finally drove him to quit wasn’t only the public pressure, it was a Wall Street sin every rookie in the business knows to avoid: He steered the fund’s money into investments that could benefit him personally.
Meng’s seemingly abrupt resignation Wednesday from the $400 billion California Public Employees’ Retirement System was in fact months in the making, the culmination of internal scrutiny, external attacks and personal anxiety, according to people familiar with the matter. His downfall is a stunning development for the largest U.S. pension fund and raises questions about who would want to succeed him in a job that attracts so much unwelcome attention, not to mention navigate a pandemic, volatile markets and the struggling U.S. economy.
Behind the scenes, Meng was growing increasingly upset and complained to his boss, CEO Marcie Frost, that he’d become a target in the political wars constantly swirling around Calpers. When, in April, a compliance team uncovered at least one conflict-of-interest violation, it set in motion a chain of events that threatened to spark a firestorm of criticism and thrust him into the center of even more hostility.
Calpers found that Meng approved an investment into a private-equity fund managed by Blackstone Group at the same time as he held Blackstone shares.
Although his stock was valued at less than $70,000, a fraction of his $1 million-plus pay package, any management or performance fees paid by Calpers to Blackstone would, in theory, benefit Meng personally.
That kind of ethical breach is a clear no-no at virtually every investment manager, and California law required Calpers to refer it to the state’s Fair Political Practices Commission, which the fund did last week. The FPPC declined to comment.
“When it comes to personnel matters, we follow California state law and always protect privacy and due process and the rights of the individual,” Frost said in a statement Saturday. “We’ll always stay true to our mission.”
Meng on Thursday said he disclosed all of his financial holdings on applicable forms and declined to comment further on questions about his conduct. He said he resigned to focus on his health and his family.
Frost believed the violation was an unintentional error, the sloppy result of Meng’s focus on improving returns, according to a person familiar with her deliberations and discussions. But she planned to discipline him — either by cutting his incentive pay or possibly by placing a formal letter into his file. And she told him to expect a media frenzy when the FPPC publicly disclosed its own investigation into his conduct and also, with anti-China sentiment running high in the country, to prepare for a fresh round of attacks on his ethnicity and renewed speculation about his allegiances.
The fund ditched its tail-risk protection weeks before the coronavirus sent stocks into a tailspin, according to people familiar with its decision.
The new strategy will focus on long-term ownership of income-producing companies, not unlike Warren Buffett’s buy-and-hold style.
The pension fund wants to outsource some or all of its $26.2 billion in private equity investments with the money manager, people close to the matter said.
For Meng, who started as CIO in January 2019, the real trouble began in February of this year. Representative Jim Banks, an Indiana Republican, said Meng was a tool for Beijing engaged in “non-traditional espionage” and funneling American money into Chinese hands. He suggested Meng should be fired, and his call for an investigation was supported by others in the party.
A naturalized U.S. citizen, Meng had returned to China in 2015 to work as deputy CIO at the State Administration of Foreign Exchange (SAFE) after stints at Wall Street investment banks and at Calpers. Frost personally recruited him to return to the pension plan as its CIO to succeed Ted Eliopoulos, now at Morgan Stanley. Eventually, he agreed.
He was motivated, he said in an interview Thursday, by a desire to serve the state and country that had given him so much since arriving in the U.S. for graduate school 25 years ago “with a backpack and $200.”
While Calpers and several of Wall Street’s top investors supported Meng against the claims, the incident, amplified by coverage on Fox News, hurt him deeply and weakened his mental and physical health, according to people close to him. Frost even traveled to Washington to urge Republicans to cease the attacks.
More unwanted publicity came in April, when it was revealed that changes Meng made to Calpers’s portfolio in the weeks leading up to the COVID-19 pandemic cost the fund more than $1 billion in forgone payouts.
Meng defended his decision to end a hedging program in favor of what he called a lower-cost and more scalable approach to surviving market meltdowns. And while Calpers has recovered from the losses it suffered, Meng once again found himself in the glare of a harsh spotlight.
Nassim Taleb, the options specialist and best-selling author, dismissed his defense as “extremely unrigorous.” More damaging, Margaret Brown, a self-described watchdog member of Calpers’s board, said Meng had withheld information when she asked him about the performance of the hedges.
Around the same time, the internal pressure on Meng intensified.
Just weeks after steering Calpers through the coronavirus selloff, he was under the microscope for potential conflicts of interest. Frost spoke to him about the review and already he was concerned about the fallout when it became public. While Meng admitted he’d been wrong and accepted responsibility for his mistakes, she began thinking he might resign.
On July 15, Calpers reported its results, an event as closely followed on Wall Street as in the corridors of power in the state capital of Sacramento. While the 4.7% return beat Meng’s benchmark and outperformed the average pension fund, it fell short of Calpers’s 7% goal for a second straight year.
Meng was agitated. On the weekend of Aug. 1, he met twice with Frost, sharing his concerns about the compliance review. He faced fines of $5,000 for each FPPC violation and also the possibility that investigators would look beyond the Blackstone investment to consider his portfolio strategy more broadly.
In June, Meng presented the Calpers board with a new plan to steer more of the fund’s assets into private equity and private credit. However indirectly, those transactions could benefit Meng’s personal holdings too.
Last Monday, Meng and Frost met in her office at Calpers’s headquarters on Sacramento’s Q Street, both of them wearing masks and standing well apart. A blog post over the weekend zeroed in on Meng’s financial disclosures to the FPPC and suggested he had committed a felony by failing to complete them properly.
Frost explained that the next few weeks would be difficult and emotionally painful. Meng asked Calpers to prepare a public-relations plan in case he decided to leave.
On Wednesday morning, he called Frost and read her his resignation letter. In the end, she didn’t try to persuade him to stay. — Additional reporting by Romy Varghese