Lack of transparency at our nation’s public pensions makes scamming easier than cryptocurrency fraud.
Public pension funds or cryptocurrency, what’s the bigger scam? The surprising answer is pension funds, according to Anessa Santos, a Florida attorney and Special Magistrate who specializes in blockchain and fintech, and the reason why has everything to do with transparency, she says.
Long heralded as providing retirement security for America’s workers, pension plans seemingly promise employees that if they contribute a portion of their income to the plan today, they are guaranteed continued income through retirement. According to Public Plans Data, the 2020 U.S. Census reported we have roughly 6,000 public sector retirement systems that collectively hold $4.5 trillion in assets for 25.9 million government workers and retirees, and that distribute $323 billion annually. This is a massive pot of money notorious for attracting the wolves of Wall Street, including fund managers and financial advisors who exploit regulatory gaps and vulnerabilities in plan administration to enrich themselves at the expense of pensioners.
Public pensions, unlike corporate plans, are not subject to the ERISA—the federal law protecting pensions—or any other comparable comprehensive state regulatory scheme. As a result, Wall Street considers public pensions “the dumbest investors in the room” and reserves its most outrageous practices for these stooges.
According to a 2016 study by Pew Charitable Trusts, state retirement systems receive limited guidance and standards for plan management and fee disclosures from the Governmental Accounting Standards Board and the Government Finance Officers Association’s Best Practice for Public Employee Retirement Systems Investments. State and local government pensions interpret these rules differently, with some embracing greater plan transparency while others seem more interested in protecting Wall Street from public scrutiny regarding fees and corrupt industry practices. The magnitude of the problem is apparent in PEW’s illustration of how public pension fund allocations to alternative investments (such as hedge, private equity and real estate funds) doubled from 11% in 2006 to 25% in 2013. (As I point out in my book, Who Stole My Pension?, all public pensions I have investigated under-report their alternative investment holdings significantly. The true average allocation to alts is probably closer to 40% or more.)
This radical shift away from publicly traded investments is deeply concerning because alternative investments are widely understood to be high risk and high cost. These investment products provide a loophole Wall Street fund managers use to demand secrecy and eviscerate state public records laws. Alternative fund managers claim the excessive and bogus fees they charge are “trade secrets” exempt from disclosure to pension stakeholders.
“Think of these private investments like Russian nesting tea dolls,” says Santos. “The pension plan pays to invest in a fund, that pays to invest in another fund comprised of several high risk financial products, each potentially charging additional poorly-disclosed or hidden fees.”
Updated research released by the Center for Retirement Research at Boston College this August confirms that even if meaningful regulatory guardrails have been implemented since the Pew study, they don’t much matter because fiscal year 2022 returned “… record investment losses and rising pension outlays ….” In a recent headline, the Reason Foundation warned that “unfunded public pension liabilities are forecast to rise to $1.3 trillion in 2022.” In response, class-action lawsuits have surged. According to the Society for Human Resource Management, since 2020, more than 200 new class-action lawsuits have been brought under ERISA, and another 100 for breach of fiduciary duties for fees charged to plan participants, and more lawsuits are expected. Tragically, class action lawsuits alleging public pension mismanagement are almost impossible to bring under state law (since ERISA doesn’t apply).
The underlying causes of pension fund mismanagement are many, but lack of transparency is the almost always the root of the problem. Sunshine is, and always has been, the best disinfectant. If pension plans and all their investments were fully transparent and open to public scrutiny, then fraud would be far more difficult to conceal.
In contrast to public pensions, says attorney Santos, the world’s first cryptocurrency—bitcoin—operates on a fully transparent platform called a “blockchain” that is proven to be resistant to fraud and hacking by design. “If you’ll tiptoe with me through the weeds of blockchain technology for a moment,” she says, “I’ll explain how it can radically alter the pension fund playing field in favor of participants.”
Blockchain, simply described, is a new way to keep track of small details, and it solves a lot of problems we have with our current data management systems, especially where data privacy and security are concerned, she says. Fundamentally, blockchain is a decentralized network that stores digital information in blocks. Each new block of information is timestamped, numbered in sequence, and appended to the previous block, forming a chain. Anyone, anywhere, can participate in maintaining the blockchain network by running a copy of the software on their computer. These computers, called “network nodes,” each replicate the entire transaction history of the blockchain. Each transaction is verified and confirmed by at least 51% of the network nodes before being encrypted and written to the blockchain. Once recorded, the software does not permit edits, leaving a perfect trail for auditors. Blockchain, says Santos, has proven impenetrable by bad actors where the network has achieved “decentralization,” meaning, no one person or organization can control how it works.
While there are debates over what it means to be decentralized, there is consensus that both the bitcoin and ethereum blockchains have achieved it. This is why Canada’s Prime Minister, Justin Trudeau, could not stop the transmission of bitcoin to Canadians during the trucker protest. The bitcoin blockchain is so huge, spanning the breadth and depth of the globe, that you would have to turn off the global internet, forever, to kill it.
“Every transaction ever performed on publicly available blockchains like bitcoin and ethereum is always completely transparent for public inspection. Once an individual is connected to a transaction, their activity can be traced up-chain, down-chain, and cross-chain. Try doing that with cash!”
Imagine if every government transaction was recorded on a decentralized, immutable, publicly viewable blockchain, says Santos. There would be no more mystery line items or black budgets because it is the ultimate, truth-telling machine.
Santos believes the cryptocurrency fraud we hear so much about is not about this core technology, but rather is usually associated with cheap knockoffs and derivatives. They are counterfeits offered by wolves in sheep’s clothing who prey upon the hopeful and uninformed, including pensioners who were similarly scammed by regulated fund managers and financial advisors parading as fiduciaries.
When I asked her how investors can discern the difference, she responded it’s not easy and would require another article to detail. In the meantime, Santos says, consider the following: “How is it that, despite having a seemingly complex regulatory framework, pensioners continue to be legally robbed of their life savings? How is it that we have a perfect solution to corruption, but it’s never implemented? Why is it that cash is king of anonymity, but we focus on killing crypto when it’s proven traceable? Someone, or someones, is benefitting from maintaining the status quo. Who? Follow the money.”
I’m no expert on cryptocurrency transparency but I know public pensions. And, based upon 40 years of forensic experience, I can assure you the swiftest way to end public pension fraud is to restore the full transparency once demanded by state public records laws.