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louisiana pension

September 19, 2013, 11:40 AM UTC
Photo: Ingo Arndt

At the end of Office Park Boulevard in suburban Baton Rouge, there’s a bland two-story building that’s home to the Louisiana Municipal Police Employees’ Retirement System (LMPERS, pronounced “lampers”), a $1.6 billion fund that represents 12,000 retired and active municipal police officers in the state. The lawn is freshly mowed, the foyer well kept, and most days the only hum of activity comes from an upstairs office where six women — the fund’s administrative staff — report to work in color-coordinated outfits, each day a different pastel shade typically found on an Easter egg.

But there’s more to LMPERS than just curious sartorial habits. Unbeknown even to many of the cops it counts as members, or the Louisiana taxpayers who contribute to its coffers, LMPERS has become a litigation machine. The police fund is one of the country’s most voracious plaintiffs, suing companies with abandon, sometimes even more regularly than its administrative corps wears blue (every Monday). In a 10-day period in February, for example, the fund sued Dell, US Airways, Hewlett-Packard, Heinz, and EnergySolutions, America’s largest nuclear-waste company. It has been called out in defense and plaintiffs filings as a “frequent filer” and a “serial plaintiff,” and last year, in the legal brief of one firm that had previously represented LMPERS, “the most prolific filer of shareholder litigation in U.S. history.”

In June, I visited the person behind this mound of paperwork: Randy Roche, a heavyset man in comfortable shoes who serves as general counsel for the fund. A contract attorney (he’s not a full-time employee) on a fixed monthly retainer of $5,812, Roche has been empowered by LMPERS trustees — a mix of police officers, retirees, and mayors — to call the shots on securities litigation for LMPERS.

Roche is not trying to stoke stock prices like Carl Icahn or Bill Ackman. Nor is he expecting to win huge windfalls for the fund, since payouts can be shockingly low — as little as $50, he says. He’s not even trying to effect large-scale governance change the way his peers at Calpers and Calstrs began doing in the ’80s and ’90s. In fact, LMPERS has governance issues of its own, with a former contract attorney in federal prison for mail fraud and a history rich in bad decisions, boondoggles, and general mismanagement (more on this in a moment).

Roche, 64, simply believes it’s his fiduciary responsibility to file suits, to root out corporate wrongdoing and recover what he can for the fund and other shareholders — like David slinging pebbles at Goliath. “We feel quite often companies do things that aren’t appropriate, and therefore we feel we have a duty to file these claims to try to correct those things,” he tells me.

Strangely enough, this strategy doesn’t appear to be particularly lucrative. According to a document provided by Roche, the fund recovered an average of $382,000 a year between 2006 and 2011, though Roche says that number is incomplete because some settlement money goes to accounts he doesn’t see. When I asked the fund’s office staff for an estimate they referred me back to Roche.

Roche and his trustees may see themselves as vigilant shareholders, holding corporate fat cats accountable, but a Fortune review of the fund’s lawsuits — and extensive interviews with dozens of pension fund managers, corporate-governance experts, and Roche himself — suggests that LMPERS is something altogether different: a go-to institution for plaintiffs attorneys looking to sue scores of giant companies. Firms such as Bernstein Litowitz Berger & Grossmann and smaller firms such as Saxena White, among others, monitor (for free) LMPERS’s investment portfolios, and when there’s a whiff of impropriety involving one of its holdings, the firms will file the suit, foot the bill — and take their share of any settlement.

Roche greenlights the process, but he hardly seems like a man in charge. He admits he doesn’t know exactly how many lawsuits LMPERS has filed since he started working with the fund in the early ’90s (one defendant counted at least 192 in a recent five-year period; Fortune tallied 133), and he only half-jokingly confesses that he has had a hard time saying no to plaintiffs law firms offering up their services. “I was not strong enough to beat back all that were knocking at the door,” he says. LMPERS board members say they ultimately approve all the firms Roche hires.

As outrageous as LMPERS’s litigiousness may seem, there’s nothing illegal about the tiny pension fund’s profligate filings. Indeed, the whole infrastructure that supports LMPERS’s activities — the portfolio monitoring and prepackaged lawsuits — sprang up in the wake of legislation aimed at shutting down frivolous litigation, particularly the practice of using individual frontmen to file class-action suits. The federal reforms encourage sophisticated institutional investors to take the lead, but these changes have led to a series of unintended consequences: Entrepreneurial plaintiffs lawyers have found new ways to stay in the game, shifting their attention to state courts and legal maneuvers not covered by the reform. And some firms now do their best business with smaller, less sophisticated institutions. LMPERS is hardly the only fund hooking up with these lawyers, though it may be the most promiscuous.

Roche isn’t a complete naif. He knows his outside attorneys are trying to enrich themselves, but he sees the relationship as symbiotic. “We have no interest in them making money,” he says. “We have interest in protecting shareholders.” He flatly denies that LMPERS is a stooge for law firms, adding that the “professional plaintiff ” accusation is off base because “we don’t get paid for doing it.” He talks fondly of the places he’s traveled on LMPERS’s behalf, not because he got to see the sights, but because he enjoyed being part of the process, participating in depositions and mediation sessions. Just being sought-after seems to be the biggest perk of the job.

So why does LMPERS do it, really? Active board members echo Roche’s explanation of protecting the fund (and cleaning up corporate America). But given the low-cost, low-risk system the plaintiffs attorneys have set up, perhaps the better question is, Why not? That’s the explanation offered by ex officio board member Kevin Pearson, chair of the Louisiana House of Representatives retirement committee. Pearson, a financial adviser, initially expressed outrage when Fortune told him of LMPERS’s high volume of lawsuits. “I mean, what business does a little pension fund in Louisiana have suing Hershey?” he asked. A few months later, after looking into the matter, he had become somewhat more sanguine about LMPERS’s legal activities. “I don’t know if they have anything to lose,” he says. “Do they?”

To understand the current state of shareholder litigation, it is helpful to revisit the story of Steven Cooperman, a retired eye surgeon from Beverly Hills. Cooperman also filed many suits alleging stock losses resulting from corporate fraud, so many that in 1993, when he was involved in his 38th securities class action, a federal judge in Dallas declared him “one of the unluckiest and victimized investors in the history of securities.”

Cooperman, it turns out, was getting kickbacks from his lawyers — 10% of the legal fees, a nice boost to the small sum he collected as a class member. That is illegal, and when Cooperman was facing conviction for insurance fraud in an unrelated art-theft scam, he struck a deal with the prosecutors in a bid to lighten his sentence and squealed on his attorneys, top dogs at Milberg Weiss.

“Pet plaintiffs” like Cooperman were an inspiration for the Private Securities Litigation Reform Act (PSLRA), a bill passed by Congress as part of Newt Gingrich’s Contract With America in 1995. With the heft of the big accounting firms and Silicon Valley behind it, the PSLRA raised the bar for investor suits in many ways, ostensibly to end frivolous, lawyer-driven suits.

Before the reforms, the first party to file suit became lead plaintiff, and more important, the first party’s lawyers became lead counsel. The lead counsel stood to make the lion’s share of fees if the case resulted in a settlement or verdict. This state of affairs encouraged a “race to the courthouse” and tended to reward firms that had close relationships with individual prospective plaintiffs. Cases would be quick, settlements puny, and legal fees steep.

The PSLRA tilted the system in favor of large institutional investors. Shareholders with the largest loss became lead plaintiff. Pension funds were seen as the great hope: As sophisticated investors with considerably more at stake, they would better manage the lawyers for bigger settlements and lower fees, a benefit to all shareholders. After the act’s passage, SEC chairman Arthur Levitt Jr. called on institutional investors to embrace shareholder litigation as a “civic responsibility.”

Public pension funds last year were lead plaintiffs in 49% of securities class-action settlements (and studies show they do reap both larger settlements and lower fees for shareholders). Most pension funds have policies and processes for making decisions about shareholder litigation. They convene litigation committees, consult investment managers, or at least check their damages to help compute whether litigation is worth the time and effort. Many funds are content to file a proof of claim for their share of a settlement hammered out by another shareholder. “Our holdings are generally so small it’s really hard to justify expending that time and that of the administrator and others in the system,” says Joshua Mond, general counsel at Dallas Police and Fire Pension System, which, at about $3.7 billion in assets, is larger than LMPERS. Many funds also have a threshold loss, or an amount that has to be lost before the fund considers pursuing litigation. Kentucky Retirement Systems, for example, has posted a policy online that indicates that it won’t consider suing unless its loss is at least $75 million.

LMPERS does not have a policy, a strategy, or a threshold loss. Roche can recall filing a suit over as few as 1,500 shares; in Fortune’s review of cases, LMPERS sued over as little as $25,000. And while the fund has scored some spectacular financial victories for shareholders — in 2009, for example, it was one of four lead plaintiffs that reached a tentative settlement for $473 million from Schering- Plough — its cases are often ingloriously dismissed or settled for expedience.

LMPERS also pursues flavors of litigation that other pension funds don’t. Because the PSLRA law restricts lead plaintiffs to bringing only five securities class actions every three years, plaintiffs attorneys have also turned their attention to other kinds of lawsuits that aren’t subject to PSLRA oversight like derivative suits and deal cases — both less profitable varieties of shareholder litigation. In securities class actions, shareholders sue over financial losses they themselves have allegedly suffered, usually from alleged misrepresentations by corporate officers and companies. In derivative suits, on the other hand, shareholders sue on behalf of the corporation itself, alleging wrongdoing by officers or directors — breaches of duty or some other malfeasance in corporate governance. Derivative suits typically result in policy change, and if there is a financial recovery, it goes back to the company, and attorneys receive a fee set by the judge. In deal cases, which can be either class-action or derivative suits, the plaintiffs allege that corporate officers have breached their duties to the corporation by agreeing to a merger or an acquisition at a bad price.

Some 15 law firms have monitored LMPERS’s investments. The service, a clever, post-PSLRA innovation by plaintiffs firms called portfolio monitoring, is free. In exchange for complete, nearly real-time access to LMPERS’s portfolio, the firms — which trawl the news wires, scan for stock drops, and stick forensic auditors on investigations — will alert the fund when litigation opportunities arise. Roche will get a memo or a call about a possible case, weigh the facts, and quite often sue. He’ll typically, but not always, use the portfolio monitoring law firm, which will represent LMPERS at no cost and reimburse the fund for any expenses.

Portfolio monitoring is a boon to these law firms, which have at their fingertips a universe of potential claims to investigate and plaintiffs to tap. It’s a little like having a pantry stocked with ingredients. No longer do firms have to search for an institutional investor that held a certain stock at certain times — they can just go to the cupboard and see what’s there. As a $1.6 billion fund, LMPERS can rarely claim the largest loss (and thus win the lead spot in a big securities class action), but because a single man calls the shots, it can move quickly on litigation, a key ingredient for deal and derivative suits.

It’s this arrangement, and the resulting dominance of funds like LMPERS, that lead some to argue that shareholder litigation is as lawyer-driven as it was before. Rather than pet plaintiffs, one defense lawyer told me, suits are now filed by a “cabal of obscure pension funds.”

Bernstein Litowitz Berger & Grossmann, a boutique firm in New York City specializing in securities litigation, was one of the first firms to aggressively court pension funds. In 1997, Douglas McKeige, then an attorney with Bernstein Litowitz, celebrated his 40th birthday in New Orleans, where he met up with his old Tulane law-school buddy Tony Gelderman. Gelderman, an animated, urbane New Orleans native, had recently gone into private practice after many years working as the chief of staff and general counsel for then-state treasurer Mary Landrieu. McKeige told him of the recent developments with the PSLRA and asked if he had any contacts at pension funds.

Gelderman was eventually hired by Bernstein Litowitz to develop relationships with potential clients. He had seen investment bankers do it during his time at the treasurer’s office, and so he began pursuing relationships with pension funds the way Goldman Sachs would. He began attending national pension conferences, joining associations, and meeting, greeting, and speaking about opportunities in securities litigation. (Bernstein Litowitz served as lead counsel in 32% of the top 100 securities class-action post-PSLRA settlements, according to Institutional Shareholder Services. The firm declined to comment for this article, but it has said it is selective about the securities cases it pursues.)

One of the first relationships Gelderman brokered, even before joining Bernstein Litowitz, was introducing McKeige to Randy Roche, whom he’d worked with when Roche was an attorney for the Louisiana House retirement committee. Roche, a native of Bogalusa, La., a small city near the Mississippi border, as a kid aspired to become a lawyer, a profession he associated with doing right. The first in his family to go to college, Roche went to Nicholls State, and then to law school at Southern University in Baton Rouge. After several government stints, Roche segued into the role of general counsel at a handful of the state’s pension funds, sometimes on staff but more often as a contractor on retainer. Today he works for LMPERS, as well as the Harbor Police Retirement Systems, a $10 million fund. In his private practice Roche also does occasional small cases for family friends. He now works mostly from his home office — he goes to LMPERS’s headquarters for board meetings and not much else — handling benefit matters and legislative issues for the fund. Shareholder litigation makes up a tiny part of the job, he says.

Roche remembers in great detail the first time he and Bernstein Litowitz teamed up to go after a corporation: It was 1998, and LMPERS sued 3Com, the maker of the PalmPilot, in San Jose federal court for filing misleading financial statements. The case dragged on for three years, and Roche recalls sitting in a conference room full of plaintiffs lawyers, trying to agree on a settlement demand. Roche wanted more, and he said so. His insistence drew disdain from some members of the group (not his own lawyers), and he says they made him feel small, like a country bumpkin. “Everyone chewed me out. ‘You don’t know what you’re doing,’ they told me,” says Roche. Ultimately the case settled for $259 million — almost exactly what Roche says he asked for. According to press reports it was among the largest amounts ever obtained in the wake of sweeping securities litigation reform.

Since then LMPERS has gone on to file all those cases, in state and federal courts. It has pursued companies big (Google, Wal-Mart) and small (Regis Corp.) for all sorts of reasons, from executive pay to alleged fraud. It has even sued its own custodian bank, J.P. Morgan Chase, three times since 2011.

Roche’s grasp of the fund’s current legal activities, however, is a bit loose. When he first sat down with me in June, he couldn’t say how many cases the fund had going, how many firms represented the fund, or how much the fund had recovered from cases. “We have so many firms. I guess I wasn’t really keeping track too well how many I was filing,” Roche says. “I think we filed 28 cases last year.” He later sent me a list of 108 cases dating back to late 2007, with 56 marked pending. Some LMPERS cases filed during that period are not included on the list.

He does have favorite issues: He pursues oil and gas cases because those industries have an impact on Louisiana’s economy. He thinks M&A disputes are interesting because they often show directors acting in the best interest of management instead of shareholders. Golden parachutes “drive me nuts,” he says. Roche no longer travels much — it’s rarely required for derivative and deal cases — but he does review the pleadings and anything he has to sign. He seems to relish his role in the cases, however small.

Yet by his own admission Roche clearly has not, as litigation reform intended, managed his plaintiffs attorneys that well. Earlier this year his outside lawyers at Kahn Swick & Foti settled a derivative case with Bank of America for $20 million and sought “reasonable” legal fees not to exceed $13 million, or 65% of the settlement. The judge rejected the settlement as too low; other shareholders objected to the suit. The plaintiffs ultimately settled for $62.5 million, and the lawyers took in $9 million in legal fees. “They really hurt my feelings,” said Roche, who says he should have, in theory, known what the firm may have been seeking in legal fees. Roche, who says he does not plan to use Kahn Swick & Foti again, notes that he generally tries to keep fees below 25%, in line with the national average for settlements of $20 million, according to NERA Consulting. Albert Myers, a partner at Kahn Swick, notes that the settlement also included corporate governance changes. “LMPERS was an active, involved client who closely supervised the litigation, including the settlement,” he says.

LMPERS’s board may see itself as a corporate watchdog, but the fund itself has a long history of governance issues. Founded in 1973, with the policemen essentially doing the investing (they hire pros now), the fund’s portfolio was limited in its early days to fixed income. The fund diversified, and despite a minor scandal in the 1980s — the Times-Picayune reported that a majority of trustees selected a no-name institution in northern Louisiana as its custodian bank after its directors took them trout fishing and duck hunting — LMPERS entered a golden era when, flush with cash, it fattened benefits and invested in its big $2 million-plus building. Members became accustomed to annual cost-of-living adjustments, and LMPERS enjoyed a surplus as recently as 2001.

It was during this heyday that LMPERS invested in golf courses. This was the peak of the golf boom, when Tiger Woods was an untarnished star. Just a couple of states away, Alabama’s state retirement system was raking in cash, thanks to its investment in the state’s Robert Trent Jones Golf Trail. Hal Sutton, a local Louisiana boy and a future captain of the Ryder Cup team, had designed a course that was for sale. In 2001, LMPERS paid $6.8 million for Sutton’s Olde Oaks, a 27-hole golf course set on undulating hills and 340 acres just outside Shreveport. Two years later it paid $2.9 million for another brand-name course in the area — this one designed by Fred Couples — at a sheriff ‘s sale.

But the bridge — or golf course — too far was LMPERS’s next venture, extending a $30 million line of credit to another Sutton project, Boot Ranch, a golf resort in Fredericksburg, Texas, in 2004. It was a disaster — some of LMPERS’s own board members sued the fund to stop the investment; LMPERS sued Boot Ranch. Lehman Brothers, the owner, filed for bankruptcy, and Boot Ranch was foreclosed on in 2009. The resort weathered those times and now counts among its honorary members George H.W. Bush, former Citigroup chairman Sandy Weill, and country singer Pat Green. LMPERS recovered just under $5 million.

The Shreveport courses also turned out to be money pits. By the time it was all over — in August, when LMPERS finally sold them to a Chinese-American businessman for $3 million — records show the fund had blown millions on all sorts of unforeseen things, including accounting software, busted water pumps, and a sewer plant.

Meanwhile, another million dollars or so of LMPERS money gradually went missing — unnoticed for years — into an escrow account of one Randy Zinna, another contract attorney working with LMPERS. Just about everyone at the fund describes Zinna, who among other things managed LMPERS’s golf investments, as a nice, kind man whom they trusted completely. He’s now residing in a federal corrections complex in Beaumont, Texas, serving out the final five months of a 30-month sentence for mail fraud; Zinna pleaded guilty, confessing to funneling LMPERS’s funds as well as the cash of an 83-year-old widow into his account to pay off his sports gambling debts.

LMPERS members (mostly cops, of course) seethe over this sordid history and the lesser sums the board has recently squandered, but the fund has bigger problems. Like many pension funds in America, LMPERS is in rough shape: The gap between its actuarial assets and liabilities is about $931 million, meaning it is only about 60% funded. That rate frightens lawmakers and particularly Louisiana’s municipalities, which have already seen their contribution rates to the fund jump from 11% to 31% in just three years. The problem is especially acute for LMPERS because many in the police force retire early, and the municipalities, required to pay more and more to the fund, are feeling strapped, and some say they’re choosing not to hire new workers.

Despite those challenges, there are signs LMPERS is getting back on track. The fund’s financial performance is improving, and it has a new actuary and a different investment consultant (the fourth in four years). The board’s chairman is Mark Huggins, an earnest police detective who drives 3 1/2 hours each way from Monroe, La., to make the fund’s monthly meetings. (Board members receive a $75 stipend per meeting, and if the meetings run long, a lunch.)

Board members say they are proud of LMPERS’s record of aggressively suing corporations — they say enforcing laws is part of their DNA as cops. “You’ve got to watch these guys like hawks,” says Larry Reech, a retired officer who has been on the board for 32 years. He adds, “Wall Street is greedy.” Huggins, the new board chairman, speaks pretty knowledgeably about portfolio monitoring and praises Roche and the plaintiffs attorneys for updating board members on lawsuits and settlements via email and other correspondence. “We’re very fortunate,” he says. “They keep us informed of what is going on.”

Plaintiffs attorneys have their reasons for maintaining good relations with the boards of such institutions; the alliances can lead to future business. Many plaintiffs firms have “client relations” staffers who attend public pension fund events, and the firms even contribute to the campaigns of elected state and local officials. These lobbying efforts have led defense attorneys, litigation reformers, and even the plaintiffs bar itself to suggest that some state and local officials steer pension fund litigation back to the firms that filled their campaign coffers.

Roche maintains that he never feels pressure to use a plaintiffs firm just because a state official or board member recommends it — and in Louisiana, that’s about all a state official can do: An attorney general or treasurer doesn’t direct shareholder litigation. At LMPERS that’s Roche’s job, and he says he’s turned down a few gifts, such as Super Bowl and NASCAR tickets.

While attorneys will sometimes make broad statements in court linking law firms’ campaign contributions to plaintiffs’ legal activities — mostly to try to discredit a case — some litigation watchdogs say there are bigger issues than “pay to play” plaguing securities litigation today. Charles Elson, director of the University of Delaware’s John L. Weinberg Center of Corporate Governance, says that though the PSLRA improved things, it remains costly for corporations and is lawyer-driven: “A lot of suits are brought to be settled, not tried. The settlements are legal-fee-driven,” he says. “The benefits go to the lawyer rather than the investor.”

Even when investors do win big, Elson believes that the way damages are awarded is misguided. “It troubles me because the company is basically paying the shareholders who have been damaged, but with shareholders’ money,” he says. “From one pocket to the other, it’s a roundtrip, and in the meantime a lot gets taken away in terms of fees.” He suggests instead that shareholders focus on the composition of the board or governance.

Roche has heard those arguments and says he doesn’t buy them. He takes the longer view that shareholder suits are an effective deterrent that can meaningfully shape companies. And he feels the deck is increasingly stacked against plaintiffs like LMPERS. Since the PSLRA went into effect, there have been a handful of legal opinions that have chipped away at an investor’s ability to sue for damages, such as a ruling that may limit suits to companies whose shares trade on U.S.-based exchanges or that are involved in domestic transactions.

When I spoke to Roche in June he hinted that LMPERS would pare its stable of outside lawyers and might take a break from filing so many suits. “That was a shock when I looked at the report,” he told me, referring to his (incomplete) list of cases. “We’ve got to slow down a bit.” Yet he made it clear that he’s not embarrassed by the perception that LMPERS is a relentless litigator. Indeed, as Fortune went to press, I looked into a lawsuit against Onyx Pharmaceuticals, a drugmaker based in South San Francisco, Calif. Two weeks after it announced its sale to Amgen for $10.4 billion, investors sued, claiming that the deal undervalued Onyx stock and alleging that it is “infected” by conflicts of interest. One of the plaintiffs? Louisiana Municipal Police Employees’ Retirement System.

Case studies: Three suits, three outcomes

A big win?

(Securities class action)

In re Schering-Plough Corp./Enhance Litigation

LMPERS filed suit in January 2008 against the drugmaker (which merged with Merck in 2009), alleging the company misrepresented or withheld pertinent information on drug trials. LMPERS claimed a $1.1 million loss and was named one of the lead plaintiffs. A $473 million settlement for Schering-Plough shareholders is pending a fairness hearing Oct. 1. Schering-Plough denies wrongdoing.

A recovery

(Derivative case)

LMPERS  v. Chesapeake Energy Corp.

LMPERS filed suit in March 2009 over the board’s decision to award its CEO a $75 million bonus after the company’s stock price had fallen by 60%. While an appeal of a dismissal was pending, the parties settled in January 2012; the CEO agreed to buy back for $12.1 million a collection of antique maps he had sold the company, and the board committed to various reforms. Plaintiffs attorneys received $3.75 million.


(Deal case)

LMPERS v. Weiss (American Greetings Corp.)

In November 2012, LMPERS filed a class action to block the Weiss family’s bid to take American Greetings Corp. private. The suit was dismissed on Valentine’s Day (!) of this year for being filed in federal rather than state court. LMPERS appealed the dismissal. The case was dismissed again in May 2013.

This story is from the October 07, 2013 issue of Fortune.