CHICAGO - The Firemen's Annuity & Benefit Fund of Chicago terminated Smith Barney Shearson Inc. as its investment consultant after only a year over concerns about how Smith Barney got hired and how it was choosing investment managers.
Trustees for the $670 million fund replaced Smith Barney with William M. Mercer Inc., New York, for a number of reasons:
Trustees were not aware that two Boston-based Smith Barney consultants were being paid a finders fee as a result of Smith Barney winning the account.
Former trustee Norman Holland and a Smith Barney consultant traded information regarding a manager search being conducted by the firemen's fund, leading to the former trustee asking the Chicago city treasurer, also a trustee, why a particular manager was not included in a search.
The trustees decided they did not want a consultant that also was a brokerage firm.
Subsequently, the trustees grilled Smith Barney consultant Dave Shanahan in a special investment committee meeting in May after it was revealed that two Boston-based Smith Barney consultants were being paid the finders fee for an "instrumental" relationship the two had with Mr. Holland.
Trustees also were concerned that Mr. Holland and William Norris, a Smith Barney consultant not involved in the account, both contacted Miriam Santos, the city treasurer, asking why Sun Bank Capital Management, Orlando, Fla., was not part of a manager search, according to fund records. (Sun Bank officials declined comment).
"We found it very strange that someone not involved" with the board was making recommendations regarding specific investment managers, said Ms. Santos.
Smith Barney's executives deny any improprieties, although they do admit two consultants might have overstepped firm policy in speaking with Mr. Holland about a search. They also said Mr. Norris never contacted Ms. Santos.
John Karoussos, director of institutional services for Smith Barney, said it seems trustees had a perception that "confidentiality was betrayed."
Ms. Santos told Crain's Chicago Business, a sister publication of Pensions & Investments, that "the board really lost confidence in its consultant."
"We decided we didn't want a consultant who also had a brokerage operation."
Firemen's fund trustees also expressed concern that seven out of nine candidates in a search conducted by Smith Barney also were in the its wrap-fee program, and that two well-qualified, large money managers not in the program - Putnam Investment Inc., Boston, and Chancellor Capital Management Inc., New York - were not included in the search.
Smith Barney's executives say a high percentage of managers in the firm's wrap fee program could be in individual searches because Smith Barney seeks good firms for their wrap program, and because Smith Barney officials know those firms well.
Moreover, Smith Barney's executives said Chancellor was included, but didn't make the cut for performance reasons, and Putnam didn't supply performance information to Smith Barney quickly enough to be included in the search.
The two Boston-based Smith Barney consultants who know Mr. Holland - William Norris and Lawrence Driscoll - were scheduled to receive half of the $170,000 fee the firemen's fund paid to Smith Barney in the first year, one-third the second year and a declining percentage in later years, according to minutes of fund board meetings.
Transcripts also show Mr. Shanahan explaining the finders fee this way:
I think the chances of the consulting group being involved in a formal final presentation to the Chicago firemen without the relationship that Bill Norris, but particularly Larry Driscoll, had with Norm Holland, would be zero."
Messrs. Driscoll and Holland both are former firefighters, served together on the National Conference of Public Employee Retirement Systems.
Later during the same meeting, Mr. Shanahan said he believed Mr. Holland was instrumental in Smith Barney being considered for the consulting assignment.
In response to that, Mr. Holland said, "You need five votes to pass anything; it's an eight-member board. That's kind of ludicrous."
But Smith Barney's executives say nothing was improper about the services it provided, and noted the names of Messrs. Driscoll and Norris were included on the RFP Smith Barney filled out when applying for the consulting position.
Smith Barney was hired as a consultant last year after John Vann, a consultant for Dean Witter Reynolds in North Dallas, Texas, informally resigned the account, according to fund documents. But fund minutes also show fund trustees did officially terminate Dean Witter. Mr. Holland said part of the reason for the termination was the disrespect Mr. Vann showed to one of the trustees, although he said Mr. Vann "did a decent job while he was there."
In a letter to the firemen's fund, Len Reinhart, president of the consulting group, said Mr. Norris and Mr. Driscoll operated "independently of the Consulting Group process (and) utilized poor judgment in taking it upon themselves" to make contact with Mr. Holland.
But because the two are listed as consultants in the RFP, Mr. Reinhart said in the letter that "as finders on the account they receive a portion of the revenues."
"When it was determined that institutional consulting was needed, it was referred to Shanahan and his associates (including Brian Hunter) to service the account. As SBS employees being paid on an account, Norris and Driscoll had the right to know of the activities concerning that account."
Money managers for the fund contacted said they noted nothing unusual in dealing with the firm.
"Our experience was very professional" with Smith Barney, said Richard K. Mastain, managing director for Dreman Value Management L.P., Jersey City, N.J., a manager of about $100 million for the fund.
There has been no indication from anyone that Mr. Holland or Messrs. Norris and Driscoll had any type of financial relationship with Sun Bank.
And despite the termination of Smith Barney, Ms. Santos said Smith Barney had been doing a good job of bringing some new trustees up to speed on investment issues. "I would say Brian Hunter did a really good job of educating us," Ms. Santos said.
Mr. Holland, the former trustee, maintains there was nothing wrong with him getting involved in the process anyway, as a participant in the fund. Mr. Holland said he mentioned a number of firms to Ms. Santos and Mr. Norris because the search, which he said was initiated while he was a trustee, was not including all of the good managers. "I don't see why anyone should be left out (of the search), including Chicago managers," he said.
"I had some conversations with Billy Norris about Sun Bank and some other people," Mr. Holland said. "If the board has a problem with that, they have thin skins."
As a participant in the fund, he said he has a right to know what goes on with its management, particularly since its activities are a matter of public record.
Meanwhile, since the hiring of Mercer, the fund will probably reduce its current 52% allocation to large-capitalization equities to 26%, putting assets into small-cap and international, said James K. Nolan, secretary and a trustee for the fund. The fund's large-cap exposure is managed by Chicago Asset Management Co., Dreman and ANB Investment Management and Trust Co., Chicago.