Alliance Capital Management fund manager Al Harrison was a contrarian. He invested in troubled companies whose stock value is depressed; the companies he picks rebound often enough that he gets a good return. Florida liked this strategy, and gave Harrison $344 million of public pension funds to invest in 1984; by 2001, he had turned it into $3.57 billion, an above-market 15% rate of return, albeit a volatile one that included some huge losses in technology stocks. Alas, this record of high-risk, high-return strategy includes one particular stock, Enron, that did particularly poorly, and there was a $281 million loss on that series of transactions–about a third of a percent of the $100 billion pension fund. (Pension participants aren’t affected by these fluctuations because Florida has a defined-benefit plan; if, however, the fund becomes insolvent, taxpayers would be on the hook to the extent federal law provides pension fund insurance.)
Now, with the benefit of hindsight, Florida is cherry-picking. Florida had access to data about what Harrison was trading throughout the term of Alliance’s contract with the state; Harrison’s trades were consistent with that contract; indeed, Alliance met the contract’s performance goal. But Florida is dissatisfied. Florida complains that Harrison’s portfolio construction wasn’t completely consistent with a description of strategy in an Alliance brochure issued in March 2000. And, with the benefit of hindsight, Florida has decided that it prefers the terms of that particular brochure to the terms of the contract, and is asking a jury to retroactively balance the portfolio and award the state a billion dollars in damages.
Florida also complains that there was an Alliance board member, Frank Savage, who coincidentally served as a board member for Enron. Alliance notes that Savage couldn’t have influenced trading without violating insider trading laws. (And, indeed, a Florida state attorney general investigation turned up nothing nefarious; Alliance had strict rules prohibiting board members from discussing investments in their associated corporations.)
Finally, Florida complans that Harrison overruled one of his analysts, Annie Tsao, who didn’t like Enron stock, without informing the state of Tsao’s opinion. Florida hasn’t indicated, however, that it will give back money for the profitable stock purchases where Harrison disagreed with one of his twenty analysts. (And apparently Tsao’s objective analysis had merely downgraded Enron from a top-rated 1 to a 2 while reaffirming her earnings outlook, though she subjectively expressed skepticism in at least some communications.) The idea that the investor should be notified every time there’s an internal disagreement between the fund manager and an analyst about a potential investment strategy seems questionable at best, but the state is inviting a jury to impose that rule retroactively. (David Royse, “Trial opens in retirement fund Enron loss case”, AP, Mar. 8; Joni James, “Who pays when a money manager makes a bad call?”, St. Petersburg Times, Mar. 6; Harriet Johnson Brackey, “Enron among various targets”, Miami Herald, Mar. 9; David Barboza, “Analyst Dropped Enron, but Her Firm Loaded Up”, NY Times, Oct. 15, 2002; James L. Rosica, “Trial centers on manager”, Tallahassee Democrat, Mar. 9; Joni James and Alfonso Chardy, “State’s losses get scrutiny”, Miami Herald, Feb. 27, 2002).
My firm represents Alliance in other matters. As with all of my posts, I speak for neither my firm nor any of its clients.
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