An allegedly illegal soft-dollar commission arrangement is at the heart of a lawsuit by a union pension fund against a now-defunct brokerage firm.
The $640 million Automobile Mechanics Local 701 Union and Industry Pension Fund, Chicago, has filed a lawsuit in U.S. District Court for the Northern District of Illinois, Eastern Division, seeking to recover commissions paid to East West Institutional Services, a brokerage firm that was based in Harbor Woods, Mich.
The lawsuit claims the pension fund was not told -- by investment managers Fiduciary Management Associates Inc., Chicago, and Rittenhouse Financial Services Inc., Radnor, Pa. -- of any fee arrangement with East West. Such an omission violates the Employee Retirement Income Security Act, the suit says.
Defendants are East West; FMA; Robert F. Carr III, chairman of FMA; Rittenhouse; William Close and the estate of Robert Baker.
At Rittenhouse, however, spokesman William Crager said, "We've resolved our differences with them (the auto mechanics local) and we're managing money for them now." He refused to say if Rittenhouse had paid any compensation to the union pension fund.
Messrs. Close and Baker were management trustees of the pension fund. They allegedly introduced FMA and Rittenhouse to East West and "directed them to place trades of fund assets through East West," according to the lawsuit.
Mr. Baker died in 1996 and Mr. Close's whereabouts are unknown. He is believed to be in hiding and might have fled the country, according to the lawsuit.
The lawsuit said "no person associated with East West had any meaningful experience or training executing fixed-income and/or equity transactions on behalf of an institutional investor, and had no expertise or ability to conduct and/or prepare research concerning the markets, economy, specific industries and/or specific companies to assist FMA's investment decisions on behalf of the fund."
Furthermore, the suit states "East West was an undercapitalized company which, through its existence, transferred most of its income to a Cayman Islands corporation."
The lawsuit also asks to bring charges under the Racketeer Influenced and Corrupt Organizations Act for treble damages and forfeiture and for a securities fraud claim, if the facts support it, against FMA and Rittenhouse.
In another case involving East West, the pension fund of Teamsters Local 710 in Chicago was repaid more than $729,000 by Fleet Financial Group last October because of questionable fees paid to East West by its investment adviser, Shawmut National Corp. (Fleet acquired Shawmut in 1996.)
The Teamsters local also has a U.S. District Court suit pending against FMA, which along with Shawmut, was a money manager for the Teamsters local. The lawsuit was filed in March, also in the Northern District court, with essentially the same charges as the auto mechanics' lawsuit. However, this suit does not name Mr. Carr as a defendant.
The auto mechanics' lawsuit also alleges Mr. Carr personally profited from the dealings between East West, the pension fund and FMA.
In an interview, Mr. Carr denied any wrongdoing. "We are fighting the suit because it has no merit," he said. "We were introduced to East West by the two trustees (Messrs. Baker and Close) and told to place orders with the brokerage firm at competitive prices, and we did that."
One of his attorneys, John Zabriskie, a partner in the law firm Hopkins, Sutter of Chicago, said in an interview that Mr. Carr in no way personally benefited from any dealings with East West and that the accusation should be interpreted, at most, as meaning he indirectly profited from the relationship in his capacity as an officer of FMA.
Another of Mr. Carr's attorneys, Sam Skinner, also a partner in Hopkins, Sutter, said the firm will be "filing a response to the charges within the next couple of weeks."
He added: "Our position is that these charges are baseless and that there has been no violation of ERISA."
Mr. Zabriskie also said FMA is filing a similar response to the Teamsters local's lawsuit, believing it is without merit.
Mr. Skinner said it is the conduct of Messrs. Baker and Close, who were also management trustees on the Teamsters fund, that is the key to the alleged wrongdoing.
East West is out of business and Christopher Roach, owner of the firm, couldn't be reached for comment. He allegedly has had some business dealings with a Detroit organized crime family.
Hugh B. Arnold, a partner in Arnold and Kadjan, Chicago, who represents the auto mechanics' pension fund, said, "Nobody ever went to my client and got permission to (use East West)."
He added, "My client never transacted with these people. This was an enterprise with nefarious purposes in which my client took no part."
