SHAREHOLDER ADVOCATE November 2016

TRENDS IN SECURITIES LAW AND CORPORATE GOVERNANCE

Inside This Issue…

Supreme Court Hears First Insider Trading Case in Nearly Twenty Years

After nearly two decades, the Supreme Court returned to the issue of insider trading, hearing oral arguments last month about the level of “personal benefit” someone sharing a tip must derive for the government to convict of insider trading the person who profits on that information.

The case, Salman v. United States, focuses on the potential liability of the person receiving the insider information, known in legal parlance as the “tippee.” Based on their questions during oral arguments on October 5, 2016, the justices appear likely to take a middle line, which could make it easier to civilly sue on behalf of those damaged by insider trading.

Apollo Settlement Highlights Vulnerabilities Faced by Private Equity Investors

For public pension fund administrators, investing in private equity poses a difficult choice. While some research has shown that private equity has significantly outperformed other asset classes over the past decade, the uptick in enforcement actions against private equity firms by federal regulators suggests that these returns come at a cost: a loss of transparency and accountability with respect to fees, conflicts of interest, and misconduct by firms and their employees. This article discusses the recent trend in government enforcement actions against private equity firms and the vulnerabilities faced by private equity investors. Finally, it offers a few observations about what public pension fund administrators should consider when managing investments with private equity firms.

Q&A with New Cohen Milstein Attorney Jay Chaudhuri, Former General Counsel to the North Carolina State Treasurer

Jay Chaudhuri is a true shareholder advocate. As the former general counsel and senior policy advisor to North Carolina State Treasurer Janet Cowell and former chair of the Council of Institutional Investors, Jay worked to hold public corporations accountable to their shareowners. Now a recently appointed North Carolina State Senator, Jay has joined Cohen Milstein as Of Counsel in the firm’s newly opened Raleigh office. We asked Jay to take a few minutes to share his thoughts as he embarks on the next phase of his career.

More information about Cohen Milstein’s Securities Fraud/Investor Protection Practice can be found by clicking here, or by calling (202) 408-4600.

Supreme Court Hears First Insider Trading Case in Nearly Twenty Years

I. Overview

The case, Salman v. United States, focuses on the potential liability of the person receiving the insider information, known in legal parlance as the “tippee.” In this instance, the tippee, Bassam Salman, traded profitably on information he obtained from his future brother-in-law, Michael Kara, who in turn had received the information from his own brother Maher, a Citigroup employee privy to valuable advance information on healthcare stocks.

Salman, who eventually reaped $1.7 million on trades based on the information, was convicted of insider trading and the verdict was upheld by the Ninth Circuit U.S. Court of Appeals. Salman’s lawyers argue that the Supreme Court should overturn the Ninth Circuit decision because Maher Kara, the Citigroup investment banker who provided the tips, did not stand to make money on Salman’s resulting stock trades. Citing the Court’s 1983 ruling in Dirks v. SEC, government prosecutors counter that such a narrow definition of a “personal benefit” would permit anyone to provide valuable inside trading tips to friends and relatives, so long as they themselves did not profit. In turn, they want the definition expanded so that sharing insider information for almost any reason incurs liability.

Based on their questions during oral argumentson October 5, 2016, the justices appear likely to take a middle line, affirming the Ninth Circuit but declining to expand the “personal benefit” definition in Dirks, the leading case on tippee liability. Although Salman is a criminal case, affirming the Ninth Circuit could make it easier to civilly sue on behalf of those damaged by insider trading.

II. Legal Background

In Dirks, the Supreme Court said that a tippee is liable for insider trading if he knows that the tipper “personally will benefit, directly or indirectly, from his disclosure.” 463 U.S. 646 (1983). Under Dirks, a “benefit” was defined to include “mak[ing] a gift of confidential information to a trading friend or relative.” Id. at 663-664. The issue of what is meant by a “personal benefit,” particularly when inside information is exchanged between friends or relatives, seemed settled

until a 2014 Second Circuit decision in United States v. Newman, which held that in the case of tipping between friends, evidence must demonstrate that the relationship was “a meaningfully close personal relationship” such that the tipper benefits by “an exchange that is objective, consequential, and represents at least a potential gain of pecuniary or similarly valuable nature.” 773 F.3d 438 (2d Cir. 2014). Many perceived Newman’s holding as going beyond the standard articulated in Dirks because it required a tangible and pecuniary benefit to the tipper. The Supreme Court refused to review Newman, but a split among circuits opened following the Ninth Circuit’s decision in United States v. Salman, which rejected the premise that a tangible benefit was necessary under Dirks for tippee liability. The Supreme Court agreed to review Salman in order to resolve the split among circuits.

III. Facts

As discussed above, the case involves three key players. Maher Kara worked in the healthcare investment banking division of Citigroup and often spoke about his work with his brother Michael. Maher considered Michael a mentor and an advisor on Maher’s work given Michael’s background in chemistry and his understanding of the healthcare industry. Between 2004 and 2007 Maher admitted that he regularly shared inside information with his brother and Maher suspected that Michael was trading on the information, although Michael initially denied as much. In 2003, Maher became engaged to Salman’s sister and the Kara and Salman families became close. Salman and Michael in particular developed a close relationship and Michael began sharing the inside information he received from Maher with Salman and encouraged Salman to execute trades based on the information. Salaman did, profiting by $1.7 million.

The evidence presented in court demonstrated that Salman knew Maher was the source of information provided to him by Michael and that Michael and Maher shared a close and “mutually beneficial relationship.” Michael helped pay for Maher’s college, provided Maher with guidance on the healthcare industry in connection with Maher’s work at Citigroup, and stood in for Maher’s deceased father at Maher’s wedding to Salman’s sister. Maher testified that he provided Michael with inside information because he “love[d] [his] brother very much” and gave him the information to “benefit him” and “fulfill[] whatever needs [Michael] had.” In one instance, Michael told Maher he needed a “favor” and requested “information” because he “owed somebody.” Michael refused Maher’s offer of money, so Maher tipped Michael with inside information. Salman knew Michael and Maher were close.

At trial, based on the evidence above, Salman was convicted of insider trading. On appeal, he argued that his conviction should be overturned on the premise that there was not enough

information to convict him under Newman because Maher received “no tangible benefit in exchange for information.” The Ninth Circuit rejected Salman’s argument, explaining that “if Salman’s theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.” 792 F.3d 1087 (9th Cir. 2015). The Ninth Circuit concluded that Salman knew enough about the close relationship between Maher and Michael that he “must have known that, when Maher gave confidential information to Michael, he did so with the ‘intention to benefit’ a close relative” and such a benefit is sufficient for insider trading liability. Id.

Interestingly enough, the Ninth Circuit opinion was written by Judge Rakoff, a federal district court judge in the Southern District of New York, who was sitting on the Ninth Circuit by designation. Judge Rakoff, who has authored numerous opinions on insider trading, would usually be bound by the Newman decision given that his district is within the Second Circuit. However, when sitting by designation on the Ninth Circuit, he was not required to follow Newman and his decision to cabin, rather than expand Newman, adds an interesting layer to the case.

IV. Analysis and Prediction

The question presented to the Supreme Court by Salman is:

Does the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC require proof of ‘an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature’ as the Second Circuit held in United States v. Newman or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case? (citations omitted)

During oral argument, the respective sides argued at the extremes of Dirks – with Salman’s attorneys urging the Court to require a tangible financial benefit for liability to attach and the government arguing that sharing inside information for any reason whatsoever is sufficient for liability. However, it seems likely the Justices will settle somewhere in between – ultimately rejecting Newman, and affirming Dirks, but refusing to expand it.

Justices Breyer and Kagan appeared to find Salman’s attorneys’ position troubling for the integrity of the securities markets. Justice Kagan explained that Salman’s position that a tangible financial benefit is necessary for liability would require the Court to “ignore some

extremely specific language in Dirks” and to “cut back significantly from something . . . that Congress has shown no indication that it’s unhappy with.” Justice Kagan expressed concern that following Salman’s position would “essentially [] change the rules in a way that threatens th[e] integrity [of the securities markets].” Justice Breyer echoed this position noting that the statute defining insider trading has been in existence since the 1930s and the “marketplace pays a lot of attention to that.” Justices Breyer and Kennedy’s questions indicated they are of the opinion that providing inside information to help a family member is a benefit under Dirks. Similarly, Justice Ginsburg asked why providing inside information to have your brother stop pestering you was not a benefit under Dirks, and Justice Sotomayor asked the same with regards to why providing inside information that could ultimately be exchanged for cash, rather than cash itself, was not a benefit to the tipper.

The Justices likewise pushed back on the government’s argument. In response to the government’s position that liability would attach if the insider provided information to “anyone in the world” so long as the insider knew that person would trade on it, Justice Alito shot back stating “[i]t doesn’t seem to me that your argument is much more consistent with Dirks than [Salman’s position].” Justice Roberts stated that to him “however you read Dirks, it certainly doesn’t go beyond gifts.” Justice Sotomayor expressed concern that the government’s position would not do much to clarify the law and Justices Ginsburg and Breyer both seemed concerned about having clear lines for the scope of liability. In one potentially telling exchange, the government explained “[i]f the Court feels more comfortable given the facts of this case . . . reaffirming Dirks and saying that was the law in 1983, it remains the law today, that is completely fine with the government.”

We predict the Court will affirm the Ninth Circuit and will reaffirm Dirks, but will not expand the scope of insider trading liability.

V. Implications

If the Court affirms the Ninth Circuit, the decision would give us solid legal footing to expand the universe of insider trading claims we bring on behalf of our clients. For example, we may be able to hold liable individuals who execute trades on behalf of hedge funds and mutual funds based on knowledge of insider information obtained from corporate insiders. While we recognize the Salman case is criminal rather than civil, we believe that lower courts would apply similar standards in the context of civil liability for insider trading.

From a broader policy perspective, we think affirming the Ninth Circuit’s decision will serve as a necessary check on the fairness and transparency of our securities markets and will arm market

participants harmed by insider trading with greater ability to hold accountable those who engage in illegal insider trading. In the face of clearer liability standards for insider trading, we would expect to see an increase in the integrity and efficiency of the securities markets, which we always view as a positive outcome for our clients.

Apollo Settlement Highlights Vulnerabilities Faced by Private Equity Investors

When For public pension fund administrators, investing in private equity poses a difficult choice. While some research has shown that private equity has significantly outperformed other asset classes over the past decade,1 the uptick in enforcement actions against private equity firms by federal regulators suggests that these returns come at a cost: a loss of transparency and accountability with respect to fees, conflicts of interest, and misconduct by firms and their employees. This article discusses the recent trend in government enforcement actions against private equity firms and the vulnerabilities faced by private equity investors. Finally, it offers a few observations about what public pension fund administrators should consider when managing investments with private equity firms.

Targeting Private Equity Firms

A $52.7 million settlement between private equity giant Apollo Global Management and the U.S. Securities and Exchange Commission in August showed the tip of the SEC’s private equity enforcement iceberg: in the past year, the SEC has pursued enforcement actions and corresponding settlements against a slew of private equity firms,2 including The Blackstone Group,3 KKR,4 Lincolnshire Management,5 Cherokee,6 Fenway Partners,7 and JH Partners.8

And the Commission does not appear to be slowing down. As its director of enforcement, Andrew Ceresney, explained in May of this year, the SEC views the private equity industry as

1 Timothy Martin, “Pensions’ Private-Equity Mystery: The Full Cost,” The Wall Street Journal, Nov. 22, 2015, at http://www.wsj.com/articles/pensions-private-equity-mystery-the-full-cost-1448235489. 2 Ben Protess, “Apollo Global Settles Securities Case as S.E.C. Issues $53 Million Fine,” The New York Times, Aug. 23, 2016, at http://www.nytimes.com/2016/08/24/business/dealbook/apollo-global-settles-securities-case-as-sec-issues-53- million-fine.html?_r=0. 3 In the Matter of Blackstone Management Partners, L.L.C., et al., Advisers Act Release No. 4219 (Oct. 7, 2015), at https://www.sec.gov/litigation/admin/2015/ia-4219.pdf. 4 In the Matter of Kohlberg Kravis Roberts & Co., L.P., Advisers Act Release No. 4131 (June 29, 2015), at https://www.sec.gov/litigation/admin/2015/ia-4131.pdf. 5 In the Matter of Lincolnshire Management, Inc., Advisers Act Release No. 3927 (Sept. 22, 2014), https://www.sec.gov/litigation/admin/2014/ia-3927.pdf. 6 In the Matter of Cherokee Investment Partners, LLC and Cherokee Advisers, LLC, Advisers Act Release No. 4258 (Nov. 5, 2015), at https://www.sec.gov/litigation/admin/2015/ia-4258.pdf. 7 In the Matter of Fenway Partners, LLC, et al., Advisers Act Release No. 4253 (Nov. 3, 2015), at https://www.sec.gov/litigation/admin/2015/ia-4253.pdf. 8 In the Matter of JH Partners, LLC, Advisers Act Release No. 4276 (Nov. 23, 2015), at https://www.sec.gov/litigation/admin/2015/ia-4253.pdf.

worthy priority for its limited resources because “retail investors are significantly invested in private equity,” particularly via public pension funds.9

These SEC enforcement actions share a similar theme: that private equity firms – even sophisticated, major industry players – fail to adequately disclose to investors key details about their fee structure and conflicts of interest.10 For example, the SEC’s action against Apollo centered on four core violations of the federal securities laws governing investment advisers:

• Apollo failed to disclose to its limited partner investors that it would accelerate monitoring fees – fees paid by a portfolio company to Apollo for business and consulting advice – when a portfolio company was sold or went through an initial public offering. Instead, Apollo disclosed that it had collected accelerated monitoring fees after the acceleration had occurred and after the limited partners made their capital contributions to the respective fund. Because Apollo was the sole recipient of the monitoring fees, it was conflicted and could not consent to the practice on behalf of the fund.11 • Apollo failed to disclose to its limited partners that it would allocate accrued interest on a loan it made to its funds solely to its own general partner capital account and not to the accounts of its limited partners in the same funds.12 • Apollo failed to properly supervise a former senior partner’s expense reimbursement practices. The partner had submitted improper reimbursement requests for over three years, behavior that had been detected by Apollo in some fashion multiple times. But it was only after an outside auditor conducting a firm- wide review of expense allocations notified Apollo of the partner’s expense issues that Apollo retained an accounting firm to conduct a forensic review of the partner’s expenses, resulting in his formal separation from the firm. Apollo subsequently reported this issue to the SEC.13

9 Andrew Ceresney, “Securities Enforcement Forum West 2016 Keynote Address: Private Equity Enforcement,” May 12, 2016, at https://www.sec.gov/news/speech/private-equity-enforcement.html. 10 U.S. Securities and Exchange Commission, Press Release: "Apollo Charged With Disclosure and Supervisory Failures," Aug. 23, 2016, at https://www.sec.gov/news/pressrelease/2016-165.html. 11 In the Matter of Apollo Management V, L.P. et al., Advisers Act Release No. 4493, at 5–6 (Aug. 23, 2016), at https://www.sec.gov/litigation/admin/2016/ia-4493.pdf. 12 Id. at 2. 13 Id. at 7–8.

• Apollo had no written policies or procedures designed to prevent some of these violations, particularly with respect to the accelerated monitoring fees or the former partner’s reimbursement-related practices.14

Vulnerabilities of Public Pension Funds as Private Equity Investors

Like its predecessors, the Apollo case highlights the need for accountability in the private equity industry. The SEC has only recently started to ratchet up its regulatory scrutiny of the industry, a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s requirement that private equity advisers with more than $150 million in assets register as investment advisers with the SEC.15 The SEC has used its new authority to shine some sunlight on the industry.

But private accountability remains complicated. Private equity funds are typically organized as “alternative entities,” like limited partnerships (LPs) or limited liability companies (LLCs).16 These entities offer certain benefits, such as favorable pass-through tax treatment, a cap on liability limited to each investor’s contributions, and significant flexibility in how to structure the entities.17

That flexibility is a double-edged sword for investors in one critical way: it permits private equity firms to craft operating agreement provisions that shield them from liability and litigation, including fiduciary duty and contract litigation. In Delaware, the preferred jurisdiction for creation of these entities, the law permits parties to LP and LLC agreements to restrict or eliminate any duties a general partner or LLC manager may owe to other members of the entity/fund, provided that the provisions are included in the fund’s governing operating agreement.18 Many LP and LLC operating agreements therefore eliminate liability to the furthest extent permitted by law and include indemnification provisions that shift the cost of

14 Id. at 9. 15 Mark Maremont and Matt Jarzemsky, “Apollo to Pay $52.8 Million Over Fee Practices,” The Wall Street Journal, Aug. 23, 2016, at http://www.wsj.com/articles/apollo-to-pay-52-8-million-for-misleading-fund-investors-1471970379; King & Spalding, “SEC Enforcement Against Private Equity Firms,” Sept. 1, 2016, at http://www.kslaw.com/library/publication/ca090116a.pdf. 16 Scott Naidech, “Private Equity Fund Formation,” Practical Law Company, at 2, Nov. 2011, at http://www.msaworldwide.com/Naidech_PrivateEquityFundFormation_Nov11.pdf. 17 Id. 18 6 Del. C. § 18-1101(c) (for LLCs); 6 Del. C. § 17-1101(d) (for LPs).

any possible liability to another party, preventing, for example, a private equity firm from being financially responsible in the event of a successful lawsuit.19

As limited partners in private equity funds, public pension funds that have not bargained for fund operating agreements that permit investors to hold private equity firms accountable in litigation face an uphill battle: either they cannot sue for breach of fiduciary duty or contract because the operating agreement does not permit it, or the operating agreement permits the firm to pass the bill to a third-party via an indemnification provision.

Protecting Public Pension Fund Private Equity Investments

Public pension fund administrators intent on protecting their beneficiaries’ investments from private equity firm malfeasance can extract a few important lessons from the SEC’s recent spate of enforcement actions.

Insist on fee transparency. Demand that the private equity firm provide the pension fund’s representatives with an up-front assessment of the fees and costs that the firm may collect. Ask about monitoring fees. Ask about consulting fees. Ask about what happens in the event a portfolio company is sold privately or goes public. Make a record of the private equity firm’s correspondence, keep records of conversations and save any documents provided to the fund’s representatives.

Do not let private equity firms dictate all the terms of the operating agreement. The best opportunity to protect a public pension fund’s investment is at the very beginning, when the fund has the ability to demand that certain provisions be added – or removed – from the operating agreement. The Institutional Limited Partners Association has created principles that attempt to strike a balance between the rights of limited partners and preservation of the private equity firm’s investment discretion. Those principles are structured around three core goals: aligning the interests of the public pension fund with those of the private equity firm, creating effective governance provisions that can resolve unforeseen disputes, and promoting transparency, particularly with respect to fees.20 Those principles include draft contract language that can be the starting point for negotiations.

19 Jay Eisenhofer and Caitlyn Moyna, “What is the State of Delaware Law as it Relates to the Scope of Fiduciary Duties Owed to Investors in So-Called Alternative Entities? (Part I)” Bloomberg News, Jan. 2, 2015, at http://www.bna.com/state- delaware-law-n17179921815/. 20 Institutional Limited Partners Association, “Private Equity Principles,” January 2011, at https://ilpa.org/wp-

Litigation to protect an investor’s interest remains an option. Although Delaware law permits wide latitude to private equity firms that want to protect themselves from litigation, there are opportunities to hold accountable private equity firms that have engaged in misconduct. As an initial matter, not all operating agreements successfully preclude all fiduciary duty litigation. Delaware courts sometimes construe operating agreements as allowing some recovery by investors, depending on the facts of a particular case and how the operating agreement liability limitation and indemnification provisions are written.21

More generally, investors may be able to sue to enforce the implied covenant of good faith and fair dealing. While Delaware law authorizes LP and LLC agreements to eliminate fiduciary duties, neither an LLC agreement nor a partnership agreement may “eliminate the implied covenant of good faith and fair dealing.”22 This body of law is complex and evolving, but in general a party may sue to enforce the implied covenant of good faith and fair dealing in Delaware, which requires “that a party refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of its bargain. When exercising a discretionary right, a party to the contract must exercise its discretion reasonably.”23 An investor who believes that a private equity firm has engaged arbitrarily and unreasonably in a manner that robs the investors of the benefits of their bargain under the operating agreement may be able to bring such a claim. Although not guaranteed, litigation as private accountability can be a potent supplement to the SEC’s efforts to ensure public accountability in the private equity industry.

If you have questions about this article, or you believe your private equity advisor has engaged in malfeasance, please contact Michael Eisenkraft ([email protected]) in Cohen Milstein’s New York office, or Adam Farra ([email protected]) in Cohen Milstein’s Washington, DC office.

content/uploads/2015/07/ILPA-Private-Equity-Principles-version-2.pdf. 21 See, e.g., Auriga Capital Corp. v Gatz Properties, 40 A.3d 839, 843 (Del. Ch. 2012). 22 6 Del. C. § 17-1101(d); 6 Del. C. § 18-1101(c). 23 Gerber v. Enterprise Products Holdings, LLC, 67 A. 3d 400, 419 (Del. 2013) (citations, quotations, and emphasis omitted).

Q&A with New Cohen Milstein Attorney Jay Chaudhuri, Former General Counsel to the North Carolina State Treasurer

Shareholder Advocate: Welcome to Cohen Milstein. We couldn’t be happier to have someone aboard with your experience and, specifically, your understanding of institutional investors’ needs. What were some of the factors that went into your decision to join our firm?

Jay Chaudhuri: Based on my conversations with many other lawyers, I set out three criteria for what law firm would be the best fit for me. First and foremost, the firm must garner respect and recognition from its peer group as a leader in various practice areas, particularly in the field of securities litigation. Second, the firm must have a culture of both collaboration and community citizenship. Finally, the firm must have some ties to the South, where I live. Cohen Milstein easily fit all three criteria. I’ve been really struck by how collaboratively the firm works, even in different practice areas. In many ways, the diversity of Cohen Milstein’s practice allows the firm to think about issues in a novel way compared to other firms.

Advocate: As Chair of the Council of Institutional Investors, an education and advocacy group, you worked to effect positive change in corporate boardrooms. What are the most important issues facing shareholders? How do we move the ball forward?

Chaudhuri: I spent five years on the CII board, including serving as chair of the organization my last year. From a topline viewpoint, it’s important to underscore that good corporate governance results in better long-term value for both companies and shareholders. From my perspective, it’s worth pointing out at least three issues facing shareholders. First, shareholders should be able to hold a company’s board of directors accountable. For example, shareholders should have so-called proxy access – the right to nominate different directors – especially when the company’s board ignores them. Second, shareholders should expect executive compensation to be both transparent and linked to performance. Even the Nobel Prize winner in economics recently said CEO pay contracts are simply too complex to understand. Finally, shareholders should be able to protect their legal rights for investments made abroad. The

United States Supreme Court decision in Morrison v. National Australia Bank in 2010 uprooted a long-held precedent that had given American investors legal remedies for securities purchased on foreign exchanges.

How do shareholders continue to advance corporate governance issues? I believe we can do this in two related ways. First, institutional investors should work collaboratively similar to ways state Attorneys General work together (Ed: see below). Second, it’s important that institutional investors actively participate in organizations that champion these issues, such as the Council of Institutional Investors, National Conference on Public Employees Retirement Systems, National Association of State Treasurers, and National Association of State Retirement Associations. These organizations provide a forum for institutional investors to both discuss and strategize on ways to work together.

Advocate: In your job as general counsel and senior policy advisor to North Carolina State Treasurer Janet Cowell, you oversaw legal services for one of the largest public pension funds in the country. How do you view the challenges faced by public funds today?

Chaudhuri: These are challenging times for public pension funds, especially given our tight fiscal climate. We read in the financial press about exorbitant six-figure pension benefits and municipalities filing for bankruptcy based on underfunded pensions. But these stories both miss the point and fail to appreciate the efficiencies of defined benefit plans. In North Carolina, for example, the average pension benefit paid to a retiree is less than $21,000. And we know that defined benefit pension plans – if properly funded and managed – remain a much more cost-effective means of providing a steady retirement income than individual 401(k)-style savings plans.

I was fortunate to serve as general counsel and senior advisor at the North Carolina Department of State Treasurer, which manages a $90 billion defined benefit plan and $10 billion defined contribution. Our defined benefit plan has consistently been ranked in the top five states for pension funding. Our pension obligations are currently 96% funded, according to our actuaries. And, there are three primary reasons for our fund’s success. First, the General Assembly has fully funded our annual required contribution on the employer side. Second, any benefit improvements such as multiplier increases are actuarially valued before adopted. Finally, our fund has maintained a conservative investment strategy with a conservative discount rate.

Advocate: Before you worked for State Treasurer Cowell, you were Special Counsel to North Carolina Attorney General Roy Cooper. What did you take away from that experience?

Chaudhuri: We read about the power of collective action by state Attorneys General, often referred to as multi-state action, against a particular company or industry. Tobacco litigation and mortgage foreclosure litigation are probably the two most high-profile examples of multi- state actions. These actions require extensive cooperation among state attorneys general and their staff that cross party lines.

During my time as working for Attorney General Cooper, I had the opportunity to help spearhead a 50 state attorneys general multi-state action against two social networking sites, Facebook and MySpace, due to concerns that these sites failed to protect children from online sexual predators. After three years of negotiations, 49 state attorneys general entered into landmarks agreements with both technology companies that resulted in significant design changes on their social networking sites to better protect children.

After I moved to State Treasurer Cowell’s office, I realized that public pension funds could carry out similar collective actions. And, that’s what we did: we were able to organize coalitions of public pension funds on key corporate governance issues. As an example, after the coal mine explosion in April 2010 that led to the death of 29 workers at Massey Energy, our office took the lead in organizing a group of eight public pension funds across the country to push for board reforms. In the end, our coalition of public pension funds was able to secure the resignation of the CEO and a board member. We were also able to secure additional board reforms, including requiring annual elections for all directors and replacing the supermajority voting standards with majority voting standards. Today, the coalition’s engagement is cited as a model of collaboration by shareholder rights advocates.

Advocate: How did your work both at the Attorney General’s Office and State Treasurer’s Office shape your opinion about government prosecution versus private legal action?

Chaudhuri: Given the budgetary constraints placed on federal agencies such as the Securities and Exchange Commission, I believe that private rights of action play a significant role in enforcing federal securities laws. This avenue of enforcement empowers investors without waiting for government action. If anything, private rights of action supplement public or government enforcement. As a former chair of the Securities and Exchange Commission has said, “If private rights are cut back further, or further constrained, that puts an increasing burden on already scarce governmental resources.”

Advocate: What your opinion on retirement security in our country today?

Chaudhuri: I really believe retirement security remains a pressing issue for both our state and country. Today, about 53 percent of North Carolina workers between 18 and 64 in the private sector work for a business that does not offer a retirement plan. According to the National Institute on Retirement Security, one-third of Americans between 55 and 65 have saved no money whatsoever for retirement.

As a State Senator, I serve on the Retirement and Pensions Committee. One legislative idea I’m interested in exploring – an idea that first introduce when I served at the State Treasurer’s Office – is the Secure Choice Retirement Savings Act, a voluntary retirement savings plan that allows private sector employees to participate in a personal retirement account managed by a state-run board. Such a legislative idea has already been enacted into law in both California and Illinois.

Advocate: I know you have just started your work with Cohen Milstein, but do you have any thoughts about particular areas of focus or projects?

Chaudhuri: A key reason I was attracted to Cohen Milstein was the breadth and depth of its practice area. First and foremost, I’m looking forward to working with an already well- respected Securities Litigation and Investor Protection Practice. Cohen Milstein certainly fits that bill, with a 45-year record capped by its groundbreaking work on behalf of investors in mortgage backed securities. Second, I’ll be working closely with the Ethics & Fiduciary Counseling Practice. Like me, both Luke Bierman and Suzanne Dugan have significant experience tackling some very high-profile ethics issues at their past public pension funds. With three former public pension attorneys on its team, Cohen Milstein has a special understanding

of the challenges facing public pension funds. Finally, I’ll be working closely with Judge Martha Geer, the resident partner in our Raleigh office. Marty and I want to help expand the firm’s work in North Carolina and across the South. Marty brings significant experience to the firm’s practice in Raleigh given her almost decade and half serving as judge on the North Carolina Court of Appeals and prior litigation experience. Marty and I believe there’s a real opportunity for Cohen Milstein to partner with mid- and small-sized firms in areas ranging from civil rights to antitrust.

Advocate: Thanks, Jay. We look forward to working with you.