Nightmare on Third Avenue

I post this more in sorrow than in anger. It's to show that TIAA is not a divine entity or one that never makes mistakes. This is historical material, not current. My point is that we need to keep an eye on the company! Worse, these events were a blow to TIAA's managment's "academic" orientation. Financial Services (that is to say, Regulated lines of business) experience has become more important for TIAA and CREF governing boards, and academic status less important.

You may have read that one member of the CREF board, and one member of the TIAA board resigned, effective November 30, 2004. It turns out that, since August, 2003, they were doing business (throught an entity they formed) with a unit of our (TIAA-CREF's) "independent" auditor, Ernst and Young.

Then, around February 28, 2005, the Chairman of the CREF board resigned, because of an analogous situation a few years in the past. CREF's press release dated March 3, 2005 is no longer visible on the web site. But this later story was in the Wall Street Journal on March 4, 2005: "TIAA-CREF Says It Has Hired Pricewaterhouse as Its Auditor", by Jonathan Weil, on Page B-3. That headline certainly proves that reporters don't get to write their own headlines! You can read much of the report in that week's SEC Form 497 filing.

Each participant can form his own opinion on this unpleasant matter.I refer you to page B-30 of CREF's 2004 "Statement of Additional Information." The Appendix quotes TIAA-CREF's Policy Statement on Corporate Governance. Under "Board of Directors, A. Board Membership", it states,

"...the definition of independence should extend beyond that incorporated in amended listing standards of the exchanges. We believe independence means that a director and his or her immediate family have no present or former employment with the company, nor any substantial connection of a personal or financial nature (other than equity in the company or equivalent stake) to the company or its management that could in fact or in appearance compromise the director’s objectivity and loyalty to shareholders. To be independent, the director must not provide, or be affiliated with any organization that provides goods or services for the company if a reasonable, disinterested observer could consider the relationship substantial."

Whether or not you agree with the press release's statement that, "Professor R--- and Mr. W------ said that neither was aware that this business relationship raised an issue under the SEC’s auditor independence standards", you might ask yourself whether they should have considered our own company's standards for companies we invest in.

The first news report, breaking the story was: Weil, Jonathan and Lublin, Joann S. (December 3, 2004) "Venture Snares TIAA-CREF, Ernst", The Wall Street Journal. Because their next article had so much more information, and I don't want to push my luck in quoting copyrighted material, I've only excerpted the later article below:

The Katzenbach Report has been released by TIAA-CREF. Alas, it confirms everything in the Wall Street Journal. It's a 53-page document, but it's a lurid picture of poor management decision-making, to put it politely. To present one awful quote, out of context, a senior officer asks in an e-mail, "And might we thereby avoid disclosure?" (Page 27.) It's no accident that the .PDF isn't searchable!

These are excerpts from a detailed, copyrighted article in The Wall Street Journal. You should read the entire article, rather than assuming that my fair use of a tiny portion tells you everything you need to know. For example, this is ProQuest Article ID: 754469241.

Weil, Jonathan and Lublin, Joann S., TIAA-CREF Faces Question On Governance Fund's Brass Failed to Inform Key Panel About Improper Deal With Ernst, Its Outside Auditor, The Wall Street Journal, December 6, 2004

… a contract that the two TIAA-CREF trustees entered into with Ernst in August 2003 to jointly sell valuation services for corporate stock options, in violation of federal auditor-independence rules. Last week, the two trustees resigned, amid pressure from the Securities and Exchange Commission's office of chief accountant. …

TIAA-CREF Chairman and Chief Executive Officer H------ A------ Jr. knew about the independence violation as of Aug. 9 [2004], when Ernst first notified the company and the SEC. However, before late last week, he had informed only one of his six fellow members on TIAA-CREF's star-studded board of overseers about the matter …

… "As soon as it was clear it was a serious matter with potential to rise to the attention of the SEC, we should have been told," William G. Bowen, an overseer who is president of the Andrew W. Mellon Foundation in New York and a former president of Princeton University, said Saturday. [Overseer] Mr. Levitt, who crusaded as SEC chairman to strengthen the nation's auditor-independence rules, on Friday said he is "deeply disturbed about the failure of management and our chairman to inform all members of our board of overseers promptly." …

TIAA-CREF said neither Mr. R--- [former Presiding Trustee of CREF] nor Mr. W------ [former TIAA Trustee] disclosed their Ernst relationship on their officer-and-trustee questionnaires for 2003 or 2004 …

In the meantime, on January 27, TIAA-CREF announced that F------- D. R------ had resigned from the Board of Overseers. This had nothing to do with his work at TIAA-CREF. You may be aware that he had earlier resigned his post at Fannie Mae, honoring his promise to hold himself responsible for Fannie's financial decisions.

Then, in the Newsweek of April 25, 2005, an article by Charles Gasparino about a TIAA-CREF contract employee appeared, headed, A Criminal Slips Through: An accomplice in a huge insurance scam gained easy access to a pension fund's data. A NEWSWEEK exclusive. This problem expanded when her supervisor at TIAA-CREF in Charlotte was fired. (eWeek stories.) He sued TIAA-CREF, claiming, among other things, that he was a protected "whistleblower". Eventually, the suit was settled out of court. That means we'll never learn the terms of the settlement. It wasn't in the major newspapers, but it was posted publicly at The Chronicle of Higher Education. Andrea L. Foster (October 27, 2006) IT Manager Who Warned About Security Lapses at TIAA-CREF Settles Complaint With Company. It's worth noting that there have been literally hundreds of security breaches at financial services companies and government agencies. Many of them seem far worse than this one.

But the annus horribilis wasn't over yet: Here's an excerpt from a TIAA-CREF filing with the SEC, an addendum to our Statement of Additional Information: On May 10, 2005, E-------- A. M-----, Executive Vice President and Chief Financial Officer of the College Retirement Equities Fund (“CREF”) requested, and was granted, an unpaid leave of absence from CREF and certain other TIAA-CREF companies (“TIAA-CREF”). Ms. M----- has advised TIAA-CREF that she received a “Wells” notice from the enforcement staff of the Securities and Exchange Commission in connection with activities related to her prior employment at General Re Corporation. A "Wells notice" is an invitation to respond to the agency's intent to file a civil enforcement action against the recipient of the notice.

Months later, she resigned: Joann S. Lublin and Karen Richardson ( November 16, 2005) Financial Chief Of TIAA-CREF Resigns Her Post. Wall Street Journal. You can read her severance agreement in the hard-to-find TIAA Real Estate account SEC 8-K filing made on November 16, 2005. Refer to "Item 1.01".

Sad to say, in April, 2009, E--------- M------ was sentenced ("Gen Re Figure to Jail In an AIG Stock Case", WSJ April 3, 2009) to 18 months in federal prison for her role in the General Re scandal. This had nothing to do with her work at TIAA-CREF. In fact, there is specific evidence (in the Katzenbach Report) that her action was crucial in revealing the TIAA-CREF trustee scandal that's the main subject of this page.

Towards the end of 2005, documents filed routinely with the SEC revealed that TIAA-CREF and other respected firms had invested in the IPO of the flamed-out REFCO. (See: Gretchen Morgenson (October 16, 2005) If Refco Isn't Scary, What Is?. The New York Times.) It's true that the investment was a sub-microscopic bit of the massive CREF Stock Fund and other accounts. But that REFCO money is completely gone!

Not too much later, as TIAA-CREF moved to new software, participants began to report problems in receiving periodic payments they had successfully received in the past. Others reported difficulty seeing their balances or making online transactions. Tom Lauricella (January 11, 2006) Snafus Dog Clients of TIAA-CREF; Thousands Have Been Hit Since Thanksgiving Week Amid Update of Computers. Wall Street Journal. Online, eWeek published a myriad of reports. Unfortunately, the problems were still troublesome nine months later: (same eWeek link above.)

Amendment to SAI

NY Times summary article (pay wall)