AUSTIN, Texas -- One consulting firm quit before it started; charges that a money manager assaulted another consultant were dropped; and the Texas attorney general's office put the blame for at least some of the chaos at the Texas Permanent School Fund on the board.
So goes a month in the life of the Texas Permanent School Fund.
Richards & Tierney Inc. declined to take the fund's business because of the lack of "a positive and cohesive working relationship between the board, the staff and the consultant," said Thomas M. Richards, principal of the firm.
The search will begin again, with proposals due Dec. 19. New bids and rebidding -- even by Richards & Tierney --will be allowed, said Robert Offutt, chairman of the finance committee.
Finalists will be selected in January and office visits will be made into February, Mr. Offutt said. A final decision likely will be made by the full board of the $20 billion fund in early March.
Mr. Richards said officials at his firm would likely reassess the situation if the Texas fund invites them to participate.
"I think there is an opportunity for the board to create a very positive legacy. . . . It's an important turning point in the fund's history," Mr. Richards said.
David Bradley, a board member and member of the finance committee, believes Richards & Tierney's decision was less about solidarity than it was about money.
The firm turned down the offer after Messrs. Bradley and Offutt visited the consultant's Chicago office, where Mr. Bradley contends that in addition to the consulting position, the firm wanted to manage a portfolio using a proprietary investment strategy.
Mr. Bradley said he and Mr. Offutt were told that if the board wouldn't allow it to manage money, the consulting firm wouldn't work with the Texas fund.
"We both walked away from the table," Mr. Bradley said.
In a written statement, Mr. Richards said, "Richards & Tierney believes that a cohesive, positive working relationship between the board, the staff and the consultant must be in place before any meaningful progress can be made in accomplishing the fund's investment objectives. Our concerns . . . are that such a relationship does not currently exist. They are not nor never have been about compensation or investment management capabilities."
The Nov. 4 and 5 meetings did show a somewhat kinder, gentler Texas Permanent School fund, with less squabbling than in past meetings.
But a reallocation to the internally managed bond portfolio and a report from the Texas attorney general's office demonstrated that the excitement isn't over yet.
The need to rebalance and the size of the firm's other mandates -- not an assault allegation that has been thrown out of court -- were cited as the reason the board on Nov. 5 took $300 million from the $660 million large-cap equity portfolio run by Davis, Hamilton, Jackson & Associates.
The money will go into an internally managed domestic fixed-income portfolio.
DHJ's portfolio was reduced partly because some board members felt uncomfortable being the manager's largest client -- the Texas Permanent Fund account was twice the size of Houston-based DHJ's next-largest commitment, Mr. Offutt said.
Many plan sponsors think being a small firm's largest client can be less than ideal because the manager's size limits the overall amount of service and performance available.
DHJ, which has $4 billion in tax-exempt institutional assets under management, has been one of the fund's best-performing managers, Mr. Offutt said, returning 32.97% for the nine months ended Sept. 30.
The Texas fund was the firm's largest client, Mr. Hamilton said, but the margin between it and DHJ's second-largest account was not so great as board members may have been told.
"They threw some numbers loose and fast at the board meeting," he said.
He declined to comment as to whether the reduction was related to an assault case consultant Brian Borowski brought against Alfred Jackson, principal at DHJ, in September.
The charge has since been dismissed because of insufficient evidence. According to the firm's president, Jack Hamilton, a security tape proved Mr. Jackson's innocence.
At the September meeting, Mr. Bradley had called for DHJ's ouster because of the assault charges, over which he predicted a civil case will be brought against Mr. Jackson.
Mr. Borowski is a consultant to Mr. Bradley.
Mr. Borowski was not available for comment by press time.
Messrs. Bradley and Borowski undertook an informal investigation of a group of money managers -- including DHJ -- after the board hired the firms in 1998. Board Chairman Chase Untermeyer ultimately handed over the findings to the Texas attorney general's office, asking it to investigate "any inaccurate and fraudulent representations" made by the managers might during the bidding process.
But the attorney general's office response took issue with the board itself, not with the managers.
In a letter to Mr. Untermeyer presented at the Nov. 4 board meeting, the attorney general's office concluded that "much of the present controversy may be the result of the Board not adopting and following sound procedures."
The office "found no credible evidence of civil fraud on the part of any investment manager, staff member or consultant," wrote Andy Taylor, first assistant attorney general, in the letter.
The most serious of the accusations were made against DHJ, alleging the firm misrepresented its performance results in a proposal. The proposal was also investigated last year by the Association for Investment Management and Research, which found no basis for any action.
Other money management firms investigated by the attorney general's office were: Salomon Brothers Asset Management; Columbia Partners; Oaktree Capital Management LLC; First Quadrant Corp.; MacKay-Shields Financial Corp.; Loomis Sayles & Co.; J.&W. Seligman & Co.; and Barrow, Hanley, Mewhinney & Strauss Inc.
But Mr. Bradley had a different take on the attorney general's decision not to pursue fraud charges. Because the situation didn't warrant prosecution by the agency's standard of proof, it was looking for a graceful exit, Mr. Bradley concluded.