This Wall Street Journal ($) editorial addresses a litigation phenomenon that has been increasing in recent years — public employee pension funds serving as plaintiffs in class action lawsuits. And as the editorial notes, this new willingness to serve in such a role reflects even more troubling signs on the way in which at least several of those pension funds are operated:

It’s an article of faith these days that institutional investors are the white knights of the corporate governance crusade. And the most loyal acolytes of fiduciary duty, we are told, are the state-administered funds that provide retirement benefits for public-sector employees. But a couple of recent cases show that some public pension funds are not only failing their own beneficiaries, they are making mischief for well-run corporations.

The Journal notes that a few pension plans are collaborating with a few plaintiffs’ securities lawyers to shake down the companies in which the pension plans invest:

[T]wo funds representing Pennsylvania’s public school teachers and state employees have been busy this year suing corporate giants Time Warner and Royal Dutch/Shell Group. Alleging that the companies misled investors, the lawsuits seek hundreds of millions in damages. Since shareholders are essentially suing themselves, the main winners here will be the lawyers..

Meanwhile, the pension fund managers are not exactly providing overwhelming performance in their primary duty to the funds:

[T]he fund managers show more zeal for litigation than they do for stock picking. The two funds have lost $20 billion, or 25% of their value, over the last few years, despite paying $250 million a year in management fees. As a result, state and local governments will have to come up with extra tax revenue to make up the shortfall.

And though the performance of the managers of the Pennsylvania funds has been less than exemplary, it does not hold a candle to the corruption that takes place when one concocts the volatile mix of plaintiffs’ securities litigation with the traditional corruption of Louisiana politics:

[In Louisiana] the trustees of the state’s Teachers Retirement System were found to have violated state ethics rules by accepting golf outings, hunting trips, football games and $150 bottles of champagne from a Texas private equity firm, Hicks Muse Tate & Furst. The fund then committed more than $900 million to Hicks’s investments. The fund says that 23% of its $10 billion in assets were committed to similar “alternative” investments, earning it the rating of riskiest public pension fund in the country from Wilshire Associates. Because this strategy cost the fund somewhere between $500 million and $2 billion by different estimates, retirees are foregoing cost-of-living increases, and the state general fund and local school boards are struggling to make up billions in unfunded liabilities.
But instead of re-evaluating their investment practices, the trustees of the Louisiana fund have instead been racking up an impressive record of litigation. It has been involved in 60 class-action lawsuits in the last eight years, and a Tennessee judge last year rebuked it for seeking “lead plaintiff” status in 24 suits while already taking that role in eight others.

And what is the Louisiana fund managers’ response to such risky investment practices? They sue the company that represents one of their best investments:

To top it all off, last year the Louisiana fund tried to sue the majority shareholders of Regal Entertainment, the country’s largest operator of movie cinemas. Despite having only a $30,000 investment in the company, the fund launched an 11th hour lawsuit to stop the company from issuing an extraordinary dividend, accusing Regal’s controlling shareholders of “looting” the company.
This incendiary accusation was truly laughable. The dividend was paid equally to all shareholders, and no other investors found reason to object. After all, the company enjoys a strong cash flow, so distributing profits and increasing the company’s leverage was a legitimate management decision.
How can we say that with such certainty? Because the Louisiana teachers’ fund admitted as much when it dropped the case, in order to avoid a counterclaim by Regal. That climbdown only came after the judge refused to grant a preliminary injunction against the dividend because there was “not a shred of evidence” that minority shareholders would be hurt.
The biggest shock was just how little the Louisiana fund’s administrators knew, or cared to know, about the litigation they sponsored. Director Bonita Brown admitted in a deposition that, despite being one of only two officials responsible for deciding to initiate lawsuits, she not only had had no contact with the Regal management ahead of the lawsuit, but she also did not know whose idea it was to sue.

The Journal editorial concludes by summarizing the absurdity of it all:

So what we have here is a public fund whose risky practices have cost the taxpayer billions throwing mud at a profitable company’s management — throwing it, moreover, at a company (Regal) that was one of the fund’s better-returning investments. If the Louisiana and Pennsylvania pension funds were private entities, their trustees might well be the target of a lawsuit themselves for being so lackadaisical about their fiduciary duty. Given the ethics violations in Louisiana, state investigators might check to see whether law firms are illegally compensating trustees with junkets so they’ll ignore their duty to protect their funds from possible counterclaims arising from frivolous lawsuits.

But then everybody knows that the real blame lies with the politicians who appoint and protect these incompetent managers, and it’s up to voters to hold them accountable. Perhaps the better question is why Congress and federal judges still allow such funds to posture as guardians of good corporate governance while they dance to the trial lawyers’ tune.

Read the entire piece. The Journal editorial is correct in noting that the conduct of the pension fund trustees is certainly troubling in these particular cases. However, a related issue that the editorial does not address is whether the dubious cases are truly a significant problem or merely an anecdotal byproduct of an open civil justice system. For a detailed analysis of that issue in the context of class action settlements, see this article by Cal-Berkeley Law Professor Steven J. Choi and this Professor Bainbridge comment on Professor Choi’s article.