Firm revamps management amid storm of lawsuits and client defections
Updated with correction
Aletheia Research and Management Inc.'s recent $400,000 fine to settle SEC charges that company officials didn't tell potential clients that deficiencies had been discovered in its SEC examinations is only the firm's latest woe, as it struggles to hold onto its clients.
Legal controversies have pitted Peter Eichler Jr. — Aletheia's founder, CEO and chief investment officer — against its co-founder, a key equity investor and former top officials of Santa Monica, Calif.-based Aletheia.
In the meantime, company officials have reorganized the management structure and installed a lawyer as president, and a spokesman insists that the future is bright.
“There has been no material loss of clients as the result of the May 9 announcement of the settlement with the SEC, and we are pleased to have it behind us as we focus on building upon our strong foundation for future growth,” Aletheia spokesman Jeremy Fielding said in an e-mail.
Requests to interview Mr. Eichler or Aletheia's new president, Steve Olson, were declined by Mr. Fielding.
Mr. Olson, a former assistant U.S. attorney, has no asset management experience, but his legal background might come in handy. That's because the fine from the Securities and Exchange Commission is just the newest problem. Clients have been leaving for more than two years because of management issues that have ended up in lawsuits.
In April, investment consultant Hewitt EnnisKnupp recommended the board of the $13.2 billion Teachers' Retirement System of Louisiana terminate Aletheia, according to minutes from the meeting. The board launched a search for a new domestic growth equity manager, but has not yet hired one. Aletheia manages more than $600 million in domestic growth equities for the fund.
“We view this litigation by owners and former employees as a disturbing pattern that signals larger issues may be present, and this undermines our confidence in the organizational stability of the firm,” a Hewitt EnnisKnupp report to the Louisiana fund said.
Lisa Honore, spokeswoman for the Louisiana fund, referred questions to Hewitt EnnisKnupp consultants Scott Cooprider and Russ Ivinjack. Mr. Cooprider said he was not willing to discuss Aletheia; Mr. Ivinjack did return phone calls or e-mails.
The Louisiana portfolio was one of the largest mandates Aletheia had. The firm managed $7.5 billion as of March 31, according to company statistics. Of that, $6.5 billion was in its growth equity strategy and $654 million in its value equity strategy.
Mr. Fielding said Aletheia had $7.2 billion under management on Dec. 31. He also said assets hit the $9 billion mark in 2008 but declined due to the financial crisis.
Mr. Eichler, a veteran money manager who helped found Aletheia in 1997, is the company's majority shareholder and a key focus of lawsuits that have been filed against the firm.
One lawsuit, filed in November by Aletheia co-founder Roger Peikin, accuses Mr. Eichler of breach of fiduciary duty and wrongful termination of Mr. Peikin in July 2010. He had been chief financial officer, general counsel and executive vice president. In the suit, Mr. Peikin claims that Mr. Eichler in May 2006 directed a key staffer to use $400,000 from client accounts to purchase one-year Chinese yuan options contracts.
“Although client funds paid for the contracts, the securities were held in Aletheia's name and in Aletheia's custodian accounts at Bank of America,” the complaint reads. “In other words, clients paid for securities that were owned by Aletheia.”
The suit also says that Mr. Eichler had helped himself to a wide range of perks at the firm, using company funds for lavish family vacations that included the use of private jets and expensive hotel suites, ranging from $10,000 to $18,000 a night.
Mr. Peikin's suit also said Mr. Eichler spent $7 million to renovate Aletheia's leased office space, or $600 a square foot, in a “striking example of corporate waste.”
He said Mr. Eichler's friend, Betsy Sanders, is paid $400,000 a year as the company's director of research. “In fact,” the suit said, “Sanders is semiretired, is not an Aletheia employee and has visited Aletheia offices only five or six times over (the) past five years.”
A second dispute, which dates to February 2010, involves Aletheia and Proctor Investment Managers, New York, Aletheia's third-largest shareholder, which owns about 10% of the firm. (Mr. Eichler owns more than 50% of the shares; Mr. Peikin, more than 25%.)
Proctor bought into Aletheia through a 2006 agreement, in which Proctor became Aletheia's marketing arm. The contract was terminated the following year and is part of the ongoing litigation between the two firms.
Proctor CEO Mona Aboelnaga Kanaan did not return phone calls seeking comment.
An employment dispute was settled in September 2009 between Aletheia and two former key employees — Joseph Boskovich Sr., former vice chairman, and his son, Joseph Boskovich Jr., formervice president of institutional sales, according to those familiar with the settlement.
Mr. Boskovich Sr. was fired from the firm and took his son with him to start a competing money management firm, according to the company's version of events it has given to Aletheia clients.
Mr. Boskovich Sr. did not return phone calls seeking comment. His son said he would not comment.
Mr. Fielding, Aletheia's spokesman, said both the Peikin lawsuit and the Proctor lawsuit were without merit and that the company was vigorously defending the legal actions. He did not respond to questions about the Boskovich lawsuit.
While the Hewitt EnnisKnupp report to Louisiana said Mr. Eichler is a “talented portfolio manager,” it also states: “Our impression is that Mr. Eichler fosters an insular culture, hiring friends and close associates invested in the firm, rather than seeking the best talent available.”
“This includes his son Peter Eichler III, who is one of the research analysts on the team,” the report said.
As for client defections, Louisiana was the latest over several years. Others include the $265 million Coral Gables (Fla.) Retirement System; the $100 million West Palm Beach (Fla.) Firefighters Pension Fund; the $10 billion Oklahoma Teachers Retirement System, Tulsa; the pension fund of Royal Dutch Shell PLC, The Hague, Netherlands; and The Queensland Investment Corp., Brisbane, Australia.
Kimberly Groome, administrative manager for the Coral Gables fund, said board members terminated Aletheia in March 2011 based on the recommendation of the fund's consultant, The Bogdahn Group. Aletheia had managed a $24.3 million growth equity portfolio for the fund.
“They ( Bogdahn Group) felt the internal issues (lawsuits) could be too distracting and hurt the investment process,” she said. “It wasn't the SEC action at all.”
Minutes from the December 2010 meeting of the West Palm Beach firefighters fund show that Bogdahn Group consultant Troy Brown recommended termination of Aletheia because of underperformance and the Peikin lawsuit. Aletheia managed about $11 million in an equity growth portfolio for the fund, records show.
It was a different internal conflict that led the Oklahoma Teachers board to terminate Aletheia's $130 million growth equity portfolio in March 2009.
James Wilbanks, executive director, said that despite good performance, Mr. Eichler failed to make the required disclosure that Joseph Boskovich Sr., listed as co-portfolio manager for the Oklahoma portfolio, had left the firm.
Mr. Wilbanks said Mr. Eichler insisted that Mr. Boskovich wasn't involved in managing the portfolio. But Mr. Wilbanks said Aletheia had represented in its response to a request for proposals that Mr. Boskovich was a key person in managing the portfolio.
“Either way, it's not good,” said Mr. Wilbanks, “whether they failed to disclose or misrepresented his position.”
Failure to disclose was a part of the SEC's May 9 consent order against the company. It found that Aletheia, in seeking new business, failed to disclose in 10 RFP responses that it had received deficiency letters from the SEC regarding its failure to show it had most employees sign ethics forms. The complaint says Aletheia also failed to make or keep the employee ethics statements despite two SEC deficiency letters in 2005 and 2008.
As general partner of two hedge funds, the company also was cited between 2003 and 2008 for not having an independent accountant conduct unannounced annual examinations and for failing to provide investors, by the SEC's deadline, with annual audit reports.
Consultant Michael Rosen, a founder of investment consultant Angeles Investment Advisors, Santa Monica, said SEC charges against firms are serious matters.
“We think every firm needs to be held to the highest ethical standard,” he said.
Mr. Rosen said every client is going to view the latest SEC charges against Aletheia differently and might take different actions.
“It depends how good their performance is and how good an explanation they can give,” he said.
Mr. Rosen said Angeles never got comfortable with Aletheia's investment process and thus never recommended the firm to clients.
Still, he said, the firm has had a strong investment track record. “We don't always get it right,” he said.
The firm's two largest strategies — domestic growth and value equities — are in the top 1% since their inceptions on Jan. 1, 1998, and April 1, 2000, respectively, according to eVestment Alliance, Marietta, Ga.
“We're reluctant to make a change because they have done better than most managers,” said David Desmond, administrator of the $368.4 million City of Fort Lauderdale (Fla.) General Employees' Retirement System. Fort Lauderdale has $17.4 million in a growth equity portfoliowith Aletheia.
Another client sticking with the firm, but keeping it on the watch list, is the $490 million Austin (Texas) Police Retirement System. Aletheia runs $54.4 million in growth equities for Austin. Sampson Jordan, chief executive officer of the Austin fund, said results have been strong — 23.3% for the year ended Dec. 31, vs. 16.71% for Russell 1,000 Growth Index.
Mr. Jordan said he had concerns about management issues. but he and board members toured the Aletheia headquarters in early 2011 with Mr. Eichler and were assured that changes had been made.
“He said he had done wrong and changed and had beefed up staffing to monitor operations,“ said Mr. Jordan.
“Before, he told us, they were essentially a three-man shop.”