SAN FRANCISCO -- It just doesn't add up.
Why would William M. Stephens, a prominent money management executive and former longtime pension executive, allegedly engage in a bribe and kickback scheme with mob-tainted union pension officials?
"It doesn't make a lot of sense to me," said Rich Pehlke, the former treasurer of Ameritech Corp. who was Mr. Stephens' boss there.
"They've snared a dolphin in the tuna nets," said Paul Troup, executive vice president at Callan Associates Inc., Atlanta.
Those sentiments were echoed across the industry, although most observers asked to be unnamed.
Officials at the Federal Bureau of Investigation, the U.S. Attorney for Southern District of New York and the U.S. Securities and Exchange Commission, however, think otherwise.
Mr. Stephens, chief investment strategist at Husic Capital Management, San Francisco, faces charges of racketeering, conspiracy, illegal kickbacks, wire fraud and securities fraud. The charges carry with them a possible jail term of up to 53 years as well as civil penalties, including fines and a ban from the investment advisory industry.
Even if he refutes the charges, it likely will take years and thousands of dollars in legal costs. His reputation will be tainted permanently.
"He's toast in this business," said one observer.
Mr. Stephens reportedly was taken away in handcuffs after being arrested at his Mill Valley, Calif., home by at least six FBI agents. The massive securities fraud investigation involved 120 defendants and all five New York City organized crime families.
Mr. Stephens did not return phone calls.
To win at least $300 million in union pension fund business, the government charged, Mr. Stephens this spring had agreed to channel a portion of those funds into "fraudulent investments" that would be presented to him by an unnamed intermediary, believed to be a protected witness.
The same intermediary was able to influence the funds' selection of money managers, the SEC alleged.
Those fraudulent investments -- disguised to keep in the dark trustees who weren't involved in the bribery scheme -- included Series J preferred stock to be issued by American Realty Trust Inc., a real estate investment trust, and an interest in TradeVentureFund, a Chicago-based hedge fund, the SEC alleged. One example: 20% of assets invested in the REIT by the pension funds would be kicked back to the mob and corrupt union officials, the government alleged.
The manager of the hedge fund, Glenn Bradley Laken of Chicago, also was charged with racketeering violations.
The June 14 indictments charged that Mr. Stephens knowingly participated in the kickback scheme.
"This conduct was a fundamental repudiation of the fiduciary duty owed by an investment adviser to clients, and violated the anti-fraud provision of the Advisers Act, Securities Act and Exchange Act," the SEC charges said.
Retirement funds involved include the New York City Detectives' Endowment Association; the International Union of Operating Engineers Local 137, which had $155 million in defined benefit assets as of year-end 1998; and Production Workers Local 400 pension funds, which had $47.2 million in defined benefit assets as of year-end 1997. The size of the detectives' fund was not available.
Neal J. Howe, Husic's executive vice president and chief marketing officer, said officials at the firm were aware that the detectives' fund was a prospective client, "the same, way General Motors or IBM or any other fund would be a prospect."
Officials of the New York detectives' fund wouldn't answer the phone. But in a recorded message, Thomas J. Scotto, president of the fund, discussed Stephen Gardell, the fund's retired treasurer, who also was arrested in the securities scam. "Never, and I repeat never, has Steve Gardell approached any of the other four trustees to invest in any of the companies mentioned in this indictment," the message said.
Pensions & Investments was unable to contact the operating engineers' local; the production workers' fund, according to its Form 5500, is management by Oppenheimer Capital.
Colleagues doubt charges
To pension experts who know Mr. Stephens, the allegations just don't add up.
"None of this fits in with the character of Bill Stephens," said one source close to Mr. Stephens.
A friend of Mr. Stephens added: "I think he's been set up." It would be easy to nod assent to, say, a directed brokerage requirement in courting a prospective client, he said. "But I don't believe for a second that Bill would jeopardize" what he has accomplished.
Reputed to be very smart and aggressive, Mr. Stephens also is an avid skier, tennis player and golfer. He also knows good food and wine. "He lives life to the fullest in every regard," one former colleague said.
Mr. Stephens is passionate about investments, loving to discuss securities and investment approaches, sources said. He also had served as a grader of CFA exams for numerous years, and championed risk controls.
"He's very aggressive, a student of the industry, and he's the kind of person who is as honest as they come anywhere," said one source.
Observers noted Mr. Stephens joined the sell side two years ago to become more directly involved in the investment process.
He is believed to have won a major pay boost by joining Husic as chief investment strategist, where he instituted and monitored risk controls for the firm's investment strategies, trumpeted the firm's successful market-neutral product, and defended the company when founder Frank Husic's claimed academic credentials were found to be overstated.
"He kind of stepped up and saved the firm," one observer said.
Husic spokeswoman Abigail Baker noted Mr. Stephens had no authority to buy stocks and bonds for clients at Husic.
She also said the pension funds in question have never been Husic clients.
Suspended with pay
Mr. Stephens has been suspended, with pay, pending the outcome of the SEC investigation, Husic officials said.
"We found out about it when it hit the wires, hit the trading desk," Ms. Baker said. "It's a shock, it's really a shock."
Mr. Howe said there has been no loss of business since the allegations were publicized, although clients are concerned.
At the Ameritech pension fund, where he served as chief investment officer from July 1995 to June 1998, Mr. Stephens is credited with boosting performance to the top quartile from close to the bottom of the pack.
"The Ameritech crew, Bill included, really were straight-shooters," said Theodore Aronson, partner at Aronson + Partners, which was a manager for the pension fund before Ameritech was merged into SBC Communications Inc.
At The Southern Co., where he ran the pension fund from January 1991 to June 1995, Mr. Stephens boosted the fund's exposure to international stocks and real estate, and introduced risk-adjusted returns.
And as chief investment officer of the Illinois State Teachers' Retirement System from September 1986 to January 1991, Mr. Stephens pushed international equity exposure up to 15% in the late 1980s, "when public funds were completely frightened of international (investments)," one source said.