When Ark Asset Management Co. was ripping apart an $800 million equity portfolio of the Illinois Teachers' Retirement System, what was the pension fund's custodian, Northern Trust Co., doing?
And what were the officials at the $21.5 billion pension fund itself doing?
In terms of what Ark was doing: In a single day, it sold $579 million in stocks from an $800 million all-cap specialty growth portfolio the firm managed for the system. It did so without informing the system. Now Ark, of New York, faces a lawsuit from the Springfield, Ill.-based system, seeking $67 million in damages.
Custodial monitoring, of course, has a price. Richard Stensrud, system counsel, said information on the level of monitoring the pension fund used was not immediately available. Northern Trust officials would not comment about the system or its custody services in general, said Richard Jurek, vice president and director of corporate and institutional services marketing, and Eli Barkhausen, senior vice president and head of the public funds area.
Northern Trust, based in Chicago, is a fiduciary and should be expected to exercise judgment to assure the safety of the assets. Should Northern Trust have reported to its client, four business days after the fact, almost $600 million in trades and the moving of an equity portfolio to 75% cash? Shouldn't an alarm have gone off at Northern Trust as the cash in the portfolio began exceeding the system's 25% policy limit?
For a number of years, Northern Trust has promoted the ability of its monitoring software to police managers of custodial clients for violations of guidelines. Where were the police in the Ark case?
The Illinois Teachers system terminated Ark Oct. 29, a Friday, instructing it to cease trading by the end of the day. The lawsuit states the system first learned of Ark's huge liquidation Nov. 3, a Wednesday, when Northern Trust began to receive a large number of trade settlements in the portfolio.
Mr. Stensrud noted the system had informed Northern Trust that Friday morning it was terminating, at the end of the day, some 30 investment managers, including Ark. "That's a lot of managers, a lot of trading," for Northern Trust to monitor, he said.
Mr. Stensrud said information wasn't immediately available on when Northern Trust first received reports on Ark's trades. But other pension fund officials and consultants said custodians typically get notifications the same day the trade is made.
Ark had been a fully discretionary manager, save for the cash limit. But the portfolio manager, whose identity wasn't disclosed, apparently interpreted the termination as a license to go wild.
Ark executives declined to comment. Its public relations agent, Alan Towers, president of Alan Towers Associates Inc., New York, said whoever at Ark made the decision to trade reasoned, "It was a very good day to lock in gains." Ark, however, didn't engage in any selloff for its other clients, he added.
Mr. Stensrud said the system is reviewing its termination policies and practices in reaction to the selloff. Could Northern Trust be held to any account for not notifying the system early of the selling or the breaking of the 25% cash limit? He declined to say, adding the system wants to focus on Ark's liability. "There's no doctrine in the law: `The `you're fired, all bets are off' doctrine'," Mr. Stensrud added.
The unexpected, however, sometimes happens, as in the Ark case.