“This is incorrect,” said Viola Alepuyo in an email to Variety.
Alepuyo said the Fund, in fact, met with an attorney from the plaintiff’s office and considered a presentation to the Fund’s assessment team.
At that time, she said, the plaintiffs did not present any “substantive evidence” of wrongdoing.
“The Fund’s assessment team reviewed the U.S. General Accounting Office and U.S. Securities Exchange Commission reports (considered ‘evidence’ by plaintiff’s counsel) in order to make a determination whether the Fund should join the lawsuit against Merrill Lynch. The board determined a fiduciary audit was necessary to determine whether in fact the Fund should sue Merrill Lynch because the plaintiffs have yet to produce any real evidence,” Alepuyo told Variety.
She said they also asked the plaintiff’s lawyers if the Fund could see the report on which they base their claim. She said, “They have yet to share it with us.”
The lawyers for the plaintiffs in the Taitano et al. vs Merrill Lynch case — Robert O’Connor and Michael Dotts — alleged that the Fund hired an “independent” audit firm to “white wash” the report.
Variety reported last week that the Fund board hired an independent auditor from the West Coast to conduct a fiduciary audit that would take six to eight weeks.
During the last Fund board meeting, Alepuyo refuted the allegation of the board’s non-action on the Merrill Lynch lawsuit. She told the trustees,
“The notion of inactivity by the board is incorrect…. Just because the Fund makes no statement on what’s happening with the Merrill Lynch lawsuit does not necessarily mean the Fund isn’t doing anything.”
Variety was told that the Fund board has retained the services of a “reputable state-side firm” to conduct a fiduciary audit for $25,000.
She said that as part of the Fund board of trustees’ fiduciary duty, the board contracted to have a fiduciary audit which will take approximately six to eight weeks to complete.
Alepuyo said, “To the Board’s knowledge, plaintiffs have not made any similar attempt to have an expert review their claim, as they keep asking the Fund, a party they have already sued, to inspect more documents.”
Alepuyo said, “The board grows tired of baseless accusations without any evidence to back those allegations up.”
The Fund told Variety that it has yet to make a decision on the litigation against Merrill Lynch.
“There has been no decision yet made by the board whether or not to file a lawsuit against Merrill Lynch. However, because the plaintiffs in the Taitano et. al. case sued the Board along with Merrill Lynch, the board was left without any recourse but to file an answer in the case,” said Alepuyo.
She further clarified that the Fund isn’t preparing to file a case against Merrill Lynch based on the allegations contained in the Taitano case.
“The board will consider any wrongdoing and harm to the Fund assets, if any, based on the fiduciary audit once the report has been received. The decision whether to sue Merrill Lynch will be made by the board at that time,” said Alepuyo in an email to this reporter.
She said if the audit supports legal action against Merrill Lynch, the Fund “will act consistent with its fiduciary duty just as it would in any other matter.”
Moreover, the Fund declined to comment on the close to 100 pension groups in Florida that sued Merrill Lynch but it said the facts in the Government Accountability Office and the U.S. Securities and Exchange Commission reports regarding the Ponte Vedra South Florida office of Merrill Lynch were not similar to the facts as they occurred in the Retirement Fund.
The Fund told Variety, “It is our understanding that these pensions were all clients of one South Florida Merrill Lynch Office. Our initial investigation leads us to believe that matters were handled differently by the Merrill Office handling our account.”
On the rest of the points raised by O’Connor and Dotts in the previous article in the papers, the Fund, through its legal counsel, said nothing new had been pointed out.
In an email to Variety, the Fund said O’Connor was merely stirring the pot to keep this issue at the forefront.”
“It is true that our expert has not contacted Mr. O’Connor. It is equally true that we have not contacted Merrill Lynch. Unless and until the auditors deem it necessary or proper, they will conduct the audit free from persuasion or consultation with either side. This is to ensure impartiality,” said Alepuyo.
O’Connor and Dotts, in an interview with Variety, cited as evidence the findings of the GAO report and the SEC order that Merrill Lynch’s Ponte Vedra South Florida Office had breached its fiduciary duty by violating Section 206 (2) and Section 204 of the Investment Advisers Act of 1940 or the “Advisers Act” and Rule 204-2 (a) (14).
The GAO report found lower rates of return for ongoing plans associated with consultants that failed to disclose conflicts of interest.
Dotts said there are two parts of the case against Merrill Lynch: soft dollars and negligence.
He said, Merrill Lynch billed its clients in “soft dollars” for its services. He said Merrill Lynch would go to the Retirement Fund and asked a percentage based on the amount of assets that they manage.
He said Merrill Lynch would tell the Fund that they would have their recommended brokers place their transactions through and they would make money off the commissions.
Dotts told Variety that retirement funds all over the country agreed to the program but the Federal government found out that it created an unfair conflict of interest.
He explained, “Because rather than going out in the market and getting the best money managers, Merrill Lynch and other companies that did soft dollar arrangement would get brokers who would place through them. They wouldn’t negotiate the best terms. If you are a big institution, you may pay very, very little for your trades. But the more you pay, if Merrill Lynch is making its money off the transactions., the better for Merrill Lynch. So there was this conflict of interest that developed between Merrill Lynch and the funds that they represented.”
According to Dotts, GAO looked into this and found that this conflict of interest created roughly damages of 1.2 to 1.3 percent of the value of the Fund. “So if you take 1.2 percent of $350 million—$10 million— multiply that times the 20 years that this was going on. You start to get some huge money. That’s one aspect of it.”
Variety learned that their law firm secured documents that revealed Merrill Lynch advised the Fund to invest heavily in equities, about 75 percent.
Merrill Lynch, Dotts said, advised Fund that 75 percent in equities was a perfect fit as 70 percent was too conservative and 80 percent too risky.
He said Merrill Lynch makes money in equities. “It’s on a commission trades. The more money you invested in equities, the more money for Merrill Lynch. Steering the Fund into an overweight position in equities greatly benefited Merrill Lynch.”
He said the market corrected it in 2008 and that was when the stock market came apart.
He added that when the fund was heavily into equities, it was making high return but it is a higher risk.
“When the market corrected it, the Retirement Fund lost a whole lot of money,” he said.
He also said the market has since come back.
Moreover, in 2008, Dotts said retirees pulled out money from the Fund while the latter still had to pay benefits. “So when the market came back, there wasn’t as much money with the fund to ride the market back up,” he said.
Dotts believed that the Fund suffered a “permanent loss” by being overweight in equities and he said it was negligent of Merrill Lynch to steer the Fund into equities.
O’Connor and Dotts told Variety that it was incumbent for Merrill Lynch to advise the Fund to go ultraconservative in investments when the central government ceased making contributions to the Fund.
Dotts said, “We can’t fault the board members actually because Merrill Lynch is a big company, a good name. Why not follow what they say? As it turned out what they were saying was very bad.”
