Both sides in the fight between Boston Co. Asset Management and its 19 breakaway executives have suffered potentially serious damage, and the battle is far from over.
A suit filed by Mellon Bank Corp., BCAM's parent, could hurt efforts of the defecting executives to set up a rival money management firm. Also, the new firm isn't likely to benefit from client terminations of Boston Co. because the portfolios BCAM manages - at least $100 million - are larger than a pension fund would assign a start-up firm.
But the departure of so many executives could cripple BCAM.
Two public pension funds already have terminated Boston Co. Asset Management: the $850 million Fresno County (Calif.) Employees' Retirement Association and the $11 billion Arizona State Retirement System, Phoenix.
Gary Peterson, chief investment officer of the Fresno County fund, said the board voted to move its accounts - about $400 million in equities and fixed income - to index funds managed by Wells Fargo Nikko Advisors, San Francisco, until it can organize manager searches to place the assets, he said.
"All the people who left had worked on our accounts at one point or another," Mr. Peterson said.
For the Arizona fund, the firm had managed $650 million in equities and $350 million in fixed income, said LeRoy Gilbertson, director. That money will be moved in-house, with Axe-Houghton Associates, Rye Brook, N.Y., serving as adviser.
But some clients are standing by their manager.
Jack Gallahue, executive director of the $1.1 billion Massachusetts Bay Transportation Authority Retirement Fund, Boston, said fund officials aren't overly concerned with the departures because the firm appeared to have stabilized by locking the remaining staff in with employment contracts. The fund has $75 million in fixed-income and cash management accounts with the firm.
The new firm set up by seven former BCAM executives has applied for registration with the Securities and Exchange Commission under the name Boston Partners Asset Management. The lawsuit could be a hindrance in gaining clients.
The firm will manage value equities, balanced accounts and diversified fixed-income portfolios.
The founders, led by former Boston Co. Asset Management Inc. Chairman Desmond Heathwood, left after a proposal for a management buy-out was rejected by Mellon. Other top managers who left include President William Carter, Chief Operating Officer Michael Jones, Chief Financial Officer William Kelly and Senior Vice Presidents Harry Rosenbluth, Mark Donovan and William Leach.
Another 12 BCAM staffers departed the following week.
Mellon Bank named Christopher Condron as Boston Co. Asset Management's chairman and chief executive. Mr. Condron, a Mellon vice chairman, also assumed responsibility for all of the parent company's asset management businesses except Dreyfus Corp. Philip R. Roberts, who was appointed acting chief executive after Mr. Heathwood's departure, will continue as chief investment officer of the firm.
Mellon sued five of the seven executives, claiming the group had breached its fiduciary duty and misappropriated trade secrets.
"We have an obligation to protect the assets of our shareholders and, in effort to do that, we filed the lawsuit," said Mr. Condron. The suit alleges the proposed management buy-out was a cover story created by the men to engineer their departure from the firm. and raid its staff and clientele. The court papers claim Mr. Heathwood and his partners compiled lists of BCAM's clients and set up a Delaware corporation to establish a money management firm while claiming to be pursuing the buy-out.
Mr. Heathwood called the suit ridiculous and the allegations untrue. He added he is not planning to countersue.
"My primary interest is not being a legal scholar. My background for honesty and integrity speaks for itself. My focus is building an asset management business that is employee-owned," said Mr. Heathwood.
The departures have not decimated Boston Co. Asset Management, said Mr. Condron. The majority of the employees in the 150-person firm remain, he noted.
He said no one resigned in the international equity and cash management areas, and that 12 of 14 people in global research are still on board, as well as four of five traders.
Seven of 14 professionals in domestic equity have left, as have three of seven fixed-income professionals. Because domestic investing is process-driven, Mr. Condron said, the process will continue without the 10 equity and bond pros.
"That's one area where clients have hired us not because of any individuals but because of the process," said Mr. Condron. "That process is intact as our research department is virtually intact."
Eight of 13 people in client service remain, he said.
"We have a group of people that are committed to telling the story as it truly is to the clients. There's a genuine feistiness among the people in that area," he said.
Still, the upheaval is damaging. For one thing, it's bringing into the open the friction between Boston Co. and Mellon Bank. Bad feelings had been simmering since Mellon acquired the firm in 1993, said a marketer at a competing company.
Many Boston Co. Asset Management clients contacted by Pensions & Investments had scheduled meetings to review the situation; some have instructed their consultants to begin evaluating it; but none was ready to commit funds to Boston Partners either.
Representatives of the Boston Co. were scheduled to meet with the board of the $5.6 billion Los Angeles Fire & Police Pension Systems last Thursday. And while representatives of Boston Partners had called about their departures, they hadn't solicited business, said Thomas Lopez, chief investment officer. BCAM manages $650 million in equity and $520 million in fixed income for the fire and police fund.
"Many important portfolio professionals have left the firm. Things are not what they used to be," Mr. Lopez said. "Every day, something new happens. We're making what preparations we can, based on the information that's available."
The Massachusetts State Teachers' and Employees' Retirement Systems, Boston, also was to meet with BCAM executives as P&I went to press. The fund asked its consultant, Wilshire Associates, to provide a recommendation, said Joseph P. Craven, deputy treasurer.
The firm manages a $300 million large-capitalization value portfolio for the $8.4 billion fund. Mr. Craven said the fund can't automatically move to Boston Partners because a bidding process is required.
Harry Descoteau, executive secretary of the New Hampshire Retirement System, Concord, said the fund's consultant, Evaluation Associates, is looking into the defections. The board will evaluate the situation May 9, he said. Boston Co. Asset Management runs $133 million in domestic equities for the $2.13 billion fund.
Consultants said Boston Co. can't help but be crippled by the defections. Said Thomas H. Dodd, senior consultant at Stratford Advisory Group Inc., Chicago: "Every client at this point has done one of two things: already made the decision to leave or put them on probation. This is such a dramatic event, I wouldn't imagine that a client would do otherwise."
"Mellon and the old Boston Co. are going to have a tremendous uphill battle to demonstrate to clients that they have the forces to manage portfolios in the same way as before," said Stephen L. Nesbitt, senior vice president of Wilshire Associates Inc., Santa Monica, Calif. "The only thing they have going for them is general inertia.
"I think the clients are the losers. I think their interests are not being served."
The new firm has an equally tough road ahead, said Mr. Dodd. The lawsuit "is a cloud" and can be an impediment to gaining new business, he said. "What's critical now is that they get off and running," he said. That means taking an aggressive stand on the Mellon suit, including countersuing, to show the marketplace they mean business, he said.