NYSUT Scandal

BACKGROUND

In late April 2006, the Foundation for Education Reform & Accountability asked Attorney General Eliot Spitzer to investigate the New York State United Teachers (NYSUT) for the union’s apparent impropriety, potential fraud, and possible conflict of interest for a deal with an investment firm to endorse and promote high-expense, low-performance retirement funds to its member teachers in exchange for an estimated $3 million in annual kick-backs. Stories by the Los Angeles Times, Forbes, and 403bwise.com had previously highlighted the issue and the PBS show "Wall Street Week," likened the scheme to what happened in the Enron scandal. After this public exposure, the Attorney General revealed that he had indeed decided to investigate the issue.

Interestingly, NYSUT President Dick Iannuzzi was quoted as recently as October 2005 as saying: "When our members’ retirement savings are tampered with or treated with neglect, we take that very seriously" ( www.nysut.org/newyorkteacher/2005-2006/051020suit.html). Based on the attorney general’s findings of this latest investigation, tampering with teacher retirees’ savings is not being treated serious enough.

NYSUT attempted to defend its actions by claiming that the kick-backs it continues to receive are used to support member programs and services, and that even if there was impropriety, the subsidiary corporation it established to funnel these funds insulates the union from any liabilities (see the story from 403bwise.com, below).

INVESTIGATION

On June 13, 2006, New York State Attorney General Eliot Spitzer announced that his investigation found NYSUT had broken multiple laws and "accepted payments from an insurance company to promote the company’s retirement products to NYSUT members" and that the union "did not disclose this arrangement and, instead, took steps to conceal it."

More than 53,000 New York teachers have invested nearly $2.4 billion into these selected high-expense, low-performance retirement fund without knowing NYSUT had been receiving annual kick-backs since 1994 totaling more than $10 million.

The Attorney General’s investigation found NYSUT making money on union members’ financial losses, multiple instances of lies and deceit, multi-million dollar kick-backs, cover up, and multiple laws broken. Below are details from the attorney general’s report ( online at www.oag.state.ny.us/press/2006/jun/NYSUT%20AOD.pdf).

UNION MEMBERS’ FINANCIAL LOSS = NYSUT’S GAIN:
The NYSUT-endorsed retirement funds had expensive fees that significantly reduced the long-term value of members’ funds. Despite union members’ significant losses, NYSUT was able to line its pockets with made more than $10 million.

"NYSUT members often invested in endorsed products because they believed that the Union was vouching for the quality of those products. [NYSUT] – which urged members in flyers to ‘take advantage of your union-endorsed benefits’ – has a fiduciary duty to act in the best interest of members as it considers and endorses products." (p. 3)

"The endorsed…plan was and remains far more expensive than low cost retirement plans offered by other providers. The impact of the higher fees charged by the products as compared to a low-cost 403(b)(7) retirement plan is significant over the long term." (p. 16)

"NYSUT members paid ING over $12,000,000 in M&E fees and approximately the same amount in mutual fund costs during these twelve months. Thus in the course of one year, teachers paid about $24 million, ING paid [NYSUT] about $2.66 million, and [NYSUT] gave teachers ‘enhancements’ costing about $1 million. The difference between the monies [NYSUT] received from ING and the cost of the ‘enhancements’ went into [NYSUT’s] overhead, certain other costs associated with the plan, and a pool of excess cash, controlled by [NYSUT], that grew to $5.5 million in August 2005." (p. 7)

"In 1998, [NYSUT] – which had a financial stake in the total amount invested by NYSUT members – asked Aetna to take steps to retain teachers with large account balances who wanted to shift to cheaper plans…The result, a 403(b)(7) plan called ‘Opportunity Independence’…The mutual funds available through Opportunity Independence were, in some instances, more expensive than those offered in Opportunity Plus." (p. 9)

"NYSUT management did demonstrate financial sophistication, however, when it came to selecting retirement products for the Union’s own employees (including those who work for the Trust). They are offered 401(k) plans which are not available to school districts but are similar to 403(b)(7) plans. The 401(k) plans are administered by Fidelity Investments with combined annual expenses of approximately .50% – less than a third of the expenses of the Opportunity Plus product that the Trust urges on Union members." (p. 15-16)

LIES AND DECEIT:
NYSUT claimed to have selected the best fund for its members and instead selected high-expense, low-performance retirement funds that simply lined their pockets. NYSUT also permitted insurance company marketing representatives to pose as impartial NYSUT benefits employees to promote their products.

"One Union official stated that by engaging in the endorsement process, NYSUT members would gain ‘an advocate for their concerns or problems.’" (p. 3)

"Brochures created by [NYSUT] to describe its endorsed products assured prospective investors that ‘we’ve done all the background work, so you don’t have to!’, and ‘you needn’t spend a lot of time searching for quality insurance and investments. We already did.’ One brochure vouched that every ‘program endorsed by NYSUT Benefit Trust is researched, designed and monitored to ensure it will enhance your lifestyle….When you participate in a NYSUT benefit program, NYSUT acts as your advocate to ensure that you receive satisfaction.’ In fact, the Trust did little or no ‘background work.’" (p. 15).

"In 2001, [NYSUT] began to receive payments of $600,000 per year from ING to pay the salaries of six ‘Coordinators of Financial Services’ who traveled around New York State and gave presentations on retirement issues to school districts and Union members." (p. 6-7).
"The Coordinators held themselves out to teachers as working solely on behalf of [NYSUT] in the best interests of NYSUT members…In fact, however, the Coordinators’ salaries were paid entirely by ING." (p. 10)

"Contrary to what they told Union members, the Coordinators acted as sales agents for ING. [T]he Coordinators used ‘soft pressure tactics . . . to apply to the Union leaders to stress the importance of being supportive of NYSUT and it’s [sic] endorsed products.’" (p. 10)
"Another [NYSUT] program, Financial Building Blocks, was also advertised as a source of neutral investment information for members… However, an internal ING email from January 2004 praised an ING employee who participated in the Financial Building Blocks program for using the opportunity ‘as a ‘foot in the door’ to promote’ ING products. [NYSUT] itself attempted to obscure the role that ING/Aetna played in delivering these seminars: an email to all [NYSUT] employees dated February 5, 2001 instructs them to route calls about the program to ING/Aetna employees who would not identify themselves as such over the phone." (p. 8-9)

KICK-BACKS:
NYSUT endorsed the fund and steered members’ investments into it because it was receiving annual kick-backs of $3 million from the insurance company.

NYSUT "did not consider offering members a low-cost 403(b)(7) plan. In return for [its] endorsement of Opportunity Plus, Aetna agreed to pay an expense reimbursement that initially approximated $40,000 a year." (p. 4)

"As more NYSUT members invested in the endorsed product, Aetna, and later ING, paid ever increasing amounts to the Trust to keep the endorsement. In 1994, the endorsement agreement increased the annual payments to the Trust from $40,000 to $400,000 a year. The figure increased further to $592,000 a year in 1998. In 2001, after Aetna sold its retirement business line to ING, the Trust negotiated a payment scale starting at $1,852,000 in 2001 and gradually increasing to $2,402,000 in 2006. Also in 2001, the Trust negotiated for additional payments based on the amount of NYSUT member assets invested in ING products, later changed to a flat ‘per head’ endorsement fee based on the overall number of NYSUT members. In 2004, the Trust projected that these additional amounts would increase the total endorsement payment to the Trust to over $3,000,000 in 2005 and 2006, rising to $4,200,000 in 2009." (p. 6)

"The Opportunity Plus product was first endorsed by [NYSUT] and offered for sale in June 1989. Today, more than 53,000 current and retired school district employees participate in Opportunity Plus, which holds approximately $2,350,000,000." (p. 4-5)

COVERUP:
NYSUT intentionally hid from union members its secret partnership with the insurance company on numerous occasions.

According to the Attorney General, NYSUT "took pains to hide this ‘silent partnership’ and "urge[d] union members to attend financial planning seminars, claiming that: ‘There’s no sales pitch – they [the seminars] do not promote specific products or services.’ But contrary to this claim, the seminars were used as a ‘foot in the door’ to promote [the] retirement products."

"Until it learned of [Attorney General Spitzer’s] investigation into retirement and insurance products, [NYSUT] had never disclosed to NYSUT members that [it] received payments from ING." (p. 12)

"For its part, originally Aetna did not make any disclosure at all regarding its financial arrangements with [NYSUT]. Thus from June 1989 through November 1992, the Aetna prospectus for Opportunity Plus (the formal disclosure available to all investors) stated only that ‘Opportunity Plus is endorsed by [NYSUT] and [the Trust].’" (p. 13)
"In 2001, a senior NYSUT executive objected when ING wanted to enhance its disclosure in Opportunity Plus marketing materials to comport with National Association of Securities Dealers’ regulations… ING ultimately agreed to compromise language…" (p. 14)

LAWS BROKEN:
Although it appears as if no one at NYSUT is currently being prosecuted, the attorney general found that multiple laws were broken.

"The foregoing acts and practices of the Trust violated the Martin Act, Article 23-A of the General Business Law, which makes it illegal to employ any deception or concealment in the purchase, sale or promotion of securities." (p. 16)

"The foregoing acts and practices of the Trust violated § 63(12) of the Executive Law, because they demonstrate a persistent fraud or illegality in the conduct of a business." (p. 17)

SETTLEMENT

Many are questioning whether the punishment doled out to NYSUT and the lack of restrictions on pursuing similar activities in the future goes far enough. Consider the following:

NYSUT will reimburse the state a mere $100,000 to cover the costs of the 15-month investigation. No other fines or payments are required despite multiple laws having been broken, NYSUT having received more than $10 million in kick-backs, and union members losing significant funds from poor-quality NYSUT-endorsed investments.

NYSUT will be able to keep the more than $10 million it has received thus far in kick-backs from the investment firm and continue receiving unlimited payments from companies it endorses the retirement plans of as long as it "fully discloses" such payments to its members and the payments are for reimbursements.

NYSUT will be able to continue endorsing retirement plans, including the poor-quality plan that it was investigated for and received more than $10 million from in kick-backs, if it hires an independent consultant that recommends endorsement and open bidding is conducted.
NYSUT will also be able to continue endorsing other plans or service providers for financial counseling, legal services, disability insurance, life insurance, long-term case insurance, accidental death and dismemberment insurance, catastrophe major medical insurance, auto and home insurance, and dental and vision plans. (Although NYSUT endorses a variety of plans and service providers, the investigation only covered the union’s relationship with a single investment firm providing retirement savings plans. There were no restrictions or requirements placed on the union’s endorsement practices outside of retirement plans.)

Despite having intentionally mislead members and endorsed poor-quality retirement plans for its members, NYSUT is still allowed to offer members investment advice as long as it is "unbiased." There is no provision for monitoring NYSUT’s investment advice in the settlement.

Union members invested in the low-quality NYSUT-endorsed plan may switch to another plan without having the pay the high penalty normally applied when doing so. NYSUT is not compensating union members that left the low-quality plan prior to the settlement and were forced to pay hefty fees.