AUSTIN, Texas -- A battle is brewing as allegations of corruption continue to surface at the $20 billion Texas Permanent School Fund.
Recent board decisions to replace consultant Investment Advisory Services, Blue Bell, Pa., and not to renew Holbein Associates' contract to provide performance measurement added fuel to the fire.
In a close vote, led by David Bradley, vice chairman of the investment committee, trustees decided Sept. 10 to hire Richards & Tierney Inc., Chicago, to replace IAS for asset allocation and manager selection.
Soon after, Brian Borowski, a consultant to Mr. Bradley, said he was assaulted near the elevators outside the board room by Alfred Jackson, principal at Houston-based Davis, Hamilton, Jackson & Associates, a money manager for the fund.
Mr. Borowski said that as he was being hit with a tightly rolled-up newspaper, Mr. Jackson was ranting. "There was not even a semblance of a lucid thought," he said. Mr. Borowski said he didn't know why he was hit.
IAS assisted in the hiring of Davis, Hamilton.
According to a Department of Public Safety official, Mr. Jackson was ticketed for a Class C misdemeanor and has yet to have a hearing with a judge.
"No physical blows took place," said Jack Hamilton, president of Davis, Hamilton, Jackson.
Mr. Jackson did not return phone calls.
As a result of the incident, Mr. Bradley wants to terminate the firm, which manages a $687 million large-cap equity portfolio.
It is not known whether a special meeting will take place to address the issue or whether it will be a topic at the next regular board meeting, Nov. 4 and 5.
In addition, six fund trustees, including Mr. Bradley, have accused Davis, Hamilton, Jackson of influence peddling (Pensions & Investments, Dec. 14).
The trustees had written to the Association for Investment Management and Research, alleging the firm's marketing techniques were "unethical or, at the very least, suspect, in that they showered key state board members and staff consultants with political campaign contributions, meals and entertainment."
But Mr. Hamilton said the allegations have been investigated by (the Securities and Exchange Commission) and the AIMR and they have found no cause for this whatsoever. . . . I don't know where these things stop."
The conservative minority of the board that is pushing for a full-scale investigation by the attorney general is roughly the same group that called for the AIMR probe.
Chase Untermeyer, chairman of the Permanent School Fund board, has asked in a letter to the Texas' attorney general's office to investigate investment managers and "any inaccurate and fraudulent representations" they may have given during a bidding process. He didn't elaborate.
An internal political problem with the search for and selection of investment managers in 1997 involved pure influence peddling, said Mr. Bradley. All of the firms that trustees now want investigated were hired that year, he said. The firms likely to be investigated, according to Mr. Bradley, are: Harbor Capital Management Co.; Davis, Hamilton, Jackson; Columbia Partners LLC Investment Management; Loomis, Sayles & Co.; and Salomon Brothers Asset Management Inc.
The investigation may also be linked to consultant IAS, which assisted the board in selecting the firms.
Fred Seponara, principal of IAS, "had made manager allocation recommendations of almost $2 billion and failed to give any qualitative analysis as to why he made those recommendations," Mr. Bradley said when the board decided to bid for a new consultant.
Mr. Seponara did not return phone calls.
Mr. Untermeyer has asked the attorney general's office to determine if "any fraudulent investment performance reports and accountings were presented . . ."
If any wrongdoing is found, Mr. Untermeyer said, he wants the attorney general's office to sue to void the contracts with investment managers and consultants and to seek the return of fees and/or compensation.
A spokeswoman for the attorney general's office said the letter has been received and is under review.
Officials at Harbor Capital, Salomon Brothers and Loomis Sayles were not available for comment by press time.
Terence Collins, president of Columbia Partners, said, "We have nothing to hide. If they want to investigate, that's fine with us."
Meanwhile at board meetings, dissension is likely to continue.
"You can always count on six weirdo votes," said Mary Helen Berlanga, a Democratic board member of the 15-member board.
She voted against the hiring of two new consultants at the Sept. 10 board meeting, mainly because of her distrust of the group of board members led by Mr. Bradley.
"The prudent-man rule is what we go by, but I don't think he (Mr. Bradley) is very prudent," she said.
Ms. Berlanga and Paul Ballard, acting executive administrator of the fund, both question in particular the hiring of Houston-based Everen Securities Inc. for performance measurement.
Before the vote, Mr. Ballard told the board that Russell Stein, senior vice president at Everen, has been accused by the SEC of receiving money from a money management firm in return for business in an elaborate kickback scheme that he conducted as a consultant at Merrill Lynch Consulting Services in the early 1990s.
Robert Brunig, district trial counsel with the SEC in Fort Worth, Texas, said he was expecting a final decision soon in the case from an administrative law judge.
If the judge finds the SEC allegations true, it's possible Mr. Stein would be barred from the industry, according to Mr. Brunig.
The SEC charges did not upset Mr. Bradley because Mr. Stein would be in charge only of performance measurement, he said.
After the vote, said Ms. Berlanga, board members learned Mr. Stein is the godfather of one of Mr. Borowski's children.
Mr. Borowski contends his personal relationship with Mr. Stein had nothing to do with Everen being hired by the board. Mr. Stein, while at Merrill, was a consultant to the University of Texas Investment Management Co., while Mr. Borowski was on the fund's staff.
Mr. Borowski said he did not witness any wrongdoing or eagerness on Mr. Stein's part to bring in investment managers, but rather a push toward indexing.
A spokesman for Mr. Stein's attorney said lawyers there believe the allegations are false.
Separately, the fund intends to move forward with an asset allocation study to be done by new consultant Richards & Tierney.
The review is expected to be finished in time for the November board meeting. The current asset mix is: 57.3% domestic large-cap equity; 8.7% international equity; 4% domestic small-cap to midcap equity; 25.8% domestic core fixed income; 3.7% high-yield bonds; and 0.5% cash.