SAN DIEGO - A Securities and Exchange Commission investigation of Galleon Capital Management has prompted most of its major pension funds clients to terminate the firm, one of the largest minority-owned equity managers.
Details of the SEC investigation couldn't be learned.
However, executives of some of the pension funds said the investigation involved Galleon's trading practices and possibly use of soft dollars, or directed brokerage commissions.
But one major Galleon client - the New York City Employees' Retirement Systems - dropped Galleon mainly because of its poor investment performance.
Other clients that have terminated Galleon, San Diego, which runs $125 million in growth stocks, all for tax-exempt clients, include:
The $5.6 billion Los Angeles Fire & Police Pension System;
The $4 billion Los Angeles City Employees' Retirement System;
The $600 million Los Angeles County Metropolitan Transit Authority;
The Archdiocese of Los Angeles, which has $300 million in endowment and pension funds; and
Progress Investment Management Co., San Francisco, which runs for pension fund clients commingled funds managed by groups of minority managers.
One Galleon client, the A.H. Belo Corp., Dallas, continues to use the firm, said Vicky C. Teherani, vice president and treasurer. Belo uses Galleon for its pension fund, which has $67 million in assets, according to the Money Market Directory. She declined to discuss Galleon.
At the Los Angeles transit fund, Leslie V. Porter, treasurer, said, "We were advised by Galleon there is an SEC investigation." Galleon ran $5.2 million for the fund. Mr. Porter said the SEC subpoenaed the fund's custodian, Bankers Trust Co., New York, for records involving Galleon. He said he doesn't know anything further about the investigation.
At the Los Angeles Fire & Police fund, a spokesman said the fund dropped Galleon because of an SEC investigation, but he had no details about it. He noted, without elaborating on figures, that Galleon's performance hasn't been "too hot." The fund hired Galleon in October 1992. Galleon ran $10 million for the fund.
But the spokesman said the fund would try to find out if Galleon acted improperly in handling investments. "If a breach of fiduciary duty did occur, we'd want to look into the E&O (errors and omission) insurance," he said. "There might be something we'd have to recover."
One of Galleon's largest clients, the Los Angeles City Employees, which had $20 million with Galleon, dropped the firm because of the investigation, said Dan Gallagher, chief investment officer. But he had no details.
At the Archdiocese of Los Angeles, Jose Debasa, chief financial officer, declined to specify why it terminated Galleon. The firm ran almost $3 million for the archdiocese, he said.
Colleen Mahoney, deputy director, SEC division of enforcement, said the agency has filed no action against Galleon. She said she couldn't confirm or deny that Galleon is under investigation.
Louis Acevedo, Galleon's chief investment officer, who founded the firm in 1990, confirmed an SEC investigation, but said he couldn't comment about it or about the loss of clients.
At Progress Investment, Thurman V. White, executive vice president and chief operating officer, also declined to comment on why it dropped Galleon.
Galleon was one of the managers for Progress' pooled core equity fund and its pooled growth equity fund, which together have about $300 million in assets.
Mr. White said Progress was initiating a search to replace Galleon, hoping to find a manager by the end of October. He declined to disclose how much money Galleon ran for Progress.
In addition, Galleon was terminated as a manager in a separate account pool of minority- and women-owned money managers Progress ran for the New York City Employees' system.
Norman M. Rosner, director of the mayor's pension unit in the New York City department of finance, said Progress, with the consultation of the New York City Employees' fund, dropped Galleon because of significantly disappointing performance.
He said the New York fund is aware Galleon is under investigation by the SEC. He had no specific information, but said it possibly involves Galleon's trading practices or use of soft dollars. But he said the fund has no other information, and the decision to terminate Galleon was based on performance.
For this year, through Aug. 31, Galleon returned -3.3% for the New York fund, Mr. Rosner said. By contrast, the entire $90 million pool of six managers, including Galleon, Progress runs for the New York fund, returned 2.6% for the same period, while the Standard & Poor's 500 Stock Index returned 3.8%.
Galleon ran $11 million in the New York fund's pool.
For the two years ended Aug. 31, Galleon returned 5.4%, Mr. Rosner said. By contrast, for the same period, the entire pool of managers in the New York fund's Progress pool returned 10%, while the S&P 500 returned 10.2%.
"You can see its (Galleon's) performance dragged down the entire pool," Mr. Rosner said.
He said Progress assigned the $11 million Galleon ran for the New York fund to Brown Capital Management Inc., Baltimore. another minority-owned, growth equity manager.
The Los Angeles Fire & Police fund also reassigned the $10 million Galleon ran to Brown Capital, which already managed about $50 million for the fund.
The Los Angeles City Employees' fund reassigned the $20 million Galleon ran to an existing manager, Fiduciary Trust Co. International, said Mr. Gallagher.
The Los Angeles County Metropolitan Transit fund split one-third of the $5.2 million Galleon ran evenly between two existing managers, CIC Asset Management Inc., Los Angeles, and Brown Capital Management, said Mr. Porter. The other two-thirds will be liquidated to pay benefits.
The Archdiocese of Los Angeles is searching for another minority equity manager to replace Galleon, its only minority manager.