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September 20, 1999 01:00 AM

CONFLICT OF INTERESTS: FORMER ATLANTA FUND EXECS ARE SLAPPED WITH INDICTMENT; 2 NAMED IN SCHEME THAT COST CITY AND PENSION SYSTEM $15 MILLION

Terry Williams
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    ATLANTA -- A federal grand jury handed up a 28-count indictment against two former investment officers for the Atlanta General Employees' Pension Fund.

    The indictment charges Theresa Stanford and Raymond McClendon engaged in a scheme that resulted in a $15 million loss to the city's investment portfolio while Ms. Stanford's husband had a conflicting financial interest in Mr. McClendon's securities firm, Pryor, McClendon, Counts & Co. Inc.

    Ms. Stanford also attempted to conceal the conflict of interests, according to the indictment.

    The defendants are expected to make an initial appearance before a federal magistrate judge sometime within the next few weeks, said a spokesman for the U.S. attorney's office in Atlanta.

    Telephone calls to Ms. Stanford's home were not returned. Mr. McClendon has an unlisted telephone number. His former brokerage company still bears his name, but he hasn't worked there in more than two years, said a person answering telephone calls.

    Preferential treatment

    According to Richard H. Deane Jr., U.S. attorney for the northern district of Georgia, Mr. McClendon directed "financial benefits" to Ms. Stanford and her husband, Charlie, to ensure preferential treatment to trade securities held by the city of Atlanta.

    The indictment further charges that Mr. McClendon, assisted by Ms. Stanford, steered the city's trading activity to Pryor, McClendon, Counts & Co. at the city's expense and that the two concealed the financial benefits that Pryor, McClendon & Counts provided to the Stanfords.

    The alleged illegalities occurred between March 1992 and June 1994, according to the indictment. Ms. Stanford served as investment officer from 1983 to June 1994. As part of her duties, Ms. Stanford traded treasuries for the city of Atlanta's general account and the General Employees' Pension Fund.

    According to the indictment, Mr. Stanford quit his $50,000-a-year job with the Resolution Trust Corp. in 1992 and founded Montclaire Financial Group Inc. The indictment alleges that Mr. McClendon made a secret $30,000 loan to Charlie Stanford in or about March 1992 through a third-party conduit. The loan was not disclosed to the city of Atlanta by Ms. Stanford or Mr. McClendon, the indictment alleges.

    Between May 1992 and November 1995, Mr. McClendon paid Montclaire $325,000, according to the indictment. For most of the period, Pryor, McClendon & Counts was Montclaire's sole client, and checks totaling more than $30,000 were paid directly from Montclaire's bank account to Ms. Stanford.

    STRIPS traded

    While Mr. McClendon provided financial benefits to the Stanfords, Ms. Stanford, in her role of investment officer, gave Pryor, McClendon, Counts preferential treatment in trading U.S. Treasury STRIPS.

    (STRIPS -- separate trading of registered interest and principal of security -- are bond derivatives that result from separating the security into principal and coupon payments. The resulting securities then sold separately.)

    STRIP purchases and sales with Pryor, McClendon, Counts constituted almost 92% of the dollar amount of all of the Atlanta pension and general account STRIPS transactions from March 1992 through June 1994, according to the indictment.

    Throughout this period, the STRIPS held by Atlanta did not appear on the monthly swap report Ms. Stanford mailed to broker-dealers.

    The report contains information about the city's bond holdings and is mailed to broker-dealers to allow them to make buy-and-sell recommendations.

    "This practice minimized the ability of broker-dealers other than Pryor, McClendon to formulate and propose securities transactions involving the city's STRIPS, and thereby virtually eliminated Pryor, McClendon's competition for city business involving those STRIPS," the indictment states.

    Misuse of call report

    Ms. Stanford and Mr. McClendon also pursued a trading strategy that cost the city $15 million and enriched Mr. McClendon by that amount, the indictment alleges.

    According to the indictment, Mr. McClendon received a monthly internal city report called the security recall report, which shows all of the city's fixed-income securities holdings.

    "Armed with the city's internal security recall reports showing the city's precise month-to-month holdings in specific Treasuries, defendant Raymond J. McClendon, aided and abetted by defendant Theresa A. Stanford . . . directed a practice of holding trades to Pryor, McClendon's benefit and the city's detriment," states the indictment.

    "Through this practice, defendant Raymond J. McClendon allocated profitable trades to Pryor, McClendon's own proprietary account but instead allocated unprofitable trades to the city," the indictment states.

    By rigging the trades in this manner, Mr. McClendon took advantage of opportunities in the Treasuries market without assuming any of the corresponding market risk and shifted the market risk to the city, the indictment alleges.

    Ms. Stanford was suspended in June 1994, and an investigation into the city's STRIP trading in 1993 through Pryor, McClendon, Counts & Co. was started.

    During the six-month investigation, neither Ms. Stanford nor Mr. McClendon disclosed the business relationship between Pryor, McClendon, Counts and Mr. Stanford.

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