LOS ANGELES - The $16.5 billion Los Angeles County Employees' Retirement Association is considering changing its relationship with Chancellor Capital Management.
Some trustees are concerned about Chancellor's treatment of other investment executives referred to the firm by Los Angeles County trustees.
Other issues at a LACERA board meeting centered on the promotion of a Chancellor executive involved with the alleged mishandling of a Securities and Exchange Commission conflict of interest disclosure requirement, and Chancellor's dual position as money manager and alternative asset management consultant for the fund.
Ken Shaffer, LACERA's chief investment officer, said he will consider hiring a consultant for alternative investments that isn't also a money manager and moving discretion for making alternative investments in-house. The fund is one of New York-based Chancellor's most significant clients, investing $477 million with the firm.
Chancellor manages $29.2 billion and invests in alternative asset investments, currently one of the most popular strategies.
Bob Hermann, a fund trustee, complained following an annual presentation from Chancellor that he has received "complaint after complaint" about the way Phil Shaw - a managing director with Chancellor who considers potential alternative investments - "treats people" seeking alternative investment money and are referred by LACERA trustees.
Another trustee privately voiced the same concern.
Mr. Hermann said one group seeking venture capital money was "brushed off" and "shown the door." In another case, said Mr. Hermann, Chancellor alleged that a well-known venture capitalist didn't really have an MBA degree but later admitted it had made a clerical error.
Mr. Hermann said he doesn't "think (Chancellor's treatment of referrals) is going to change."
Mr. Hermann also said the county pension fund is paying Chancellor about $780,000 a year even though it provides little information about partnership fees. Warren Shaw, chief executive officer of Chancellor (and no relation to Phil Shaw), said "Chancellor's policy in reviewing potential investments is to evaluate them in a professional, thorough and courteous manner."
Warren Shaw added the firm reviews close to 200 partnership offerings a year on behalf of its clients, but invests in fewer than 5% of those partnerships.
Mr. Hermann also questioned Warren Shaw about withdrawing total discretion over investments from Chancellor. Mr. Hermann said the fund has significantly expanded its in-house investment staff since first hiring Chancellor.
Warren Shaw contended the fund's staff probably would have to spend too much time digging out information about little-known partnerships. Those partnerships also have a narrow investment time frame, he added.
However, Mr. Hermann said another pension fund has been able to successfully retain discretion over alternative investments. He said the $80 billion California Public Employees' Retirement System has two independent alternative asset management consultants, but it retains discretion.
Mr. Hermann said the Los Angeles fund had made alternative investments before hiring Chancellor that had "good results."
Warren Shaw said time would show that Chancellor also had made good investments at its discretion.
Another issue that concerned some trustees was the appointment of Parag Saxena as managing director of Chancellor's alternative asset management group.
Mr. Saxena was named in an SEC proceeding involving Chancellor's $750,000 settlement last fall over the charge that a Chancellor executive failed to disclose conflicts of interests on stocks recommended to clients.
Mr. Saxena agreed to pay a $250,000 fine. The SEC also censured but did not fine James Long, Chancellor's then-general counsel. Neither man admitted or denied guilt.
Warren Shaw said Chancellor chose Mr. Saxena after completing a national search and interviewing 25 candidates to replace Mark Tessler as head of the alternative investment department.
He said Chancellor did settle with the SEC in October 1994 over failure to disclose some information on a report over potential conflicts of interest. He said he was aware that "reputation is all we (Chancellor) have" and "I can't think of anyone having more personal integrity" than Mr. Saxena.
He said Chancellor hired Rachel L. Arfa in April as the firm's new general counsel and established new policies and procedures to revise the firm's code of ethics. He said he also has instituted training to make sure the ethics code is followed and understood.
Chancellor stated in a memo to the Los Angeles County board "that the SEC inquired into Chancellor's pre-August 1992 disclosure and record-keeping practices (and) focused on three personal founder's trades made by Parag Saxena between 1988 and 1991."
The statement said Mr. Saxena obtained "pre-approval," which was given by Chancellor's legal department, before each stock purchase. It also said that at the time of Mr. Saxena's purchases, the investments were "inappropriate" for any Chancellor clients.