SALT LAKE CITY - Richard Cherry, chief investment officer for the $11.5 billion Utah Retirement System, is on paid administrative suspension pending the outcome of investigations into allegations of insider trading, and other alleged activity that may have caused undue influence on the system's money managers.
The Securities and Exchange Commission, the Utah Division of Securities and the URS are investigating the personal investment activities of Mr. Cherry and other plan officials, said Tony Taggart, director of the Utah Division of Securities, Salt Lake City. The investigations were spurred by a report from the state Legislative Auditor General's Office released earlier this month. The report said Mr. Cherry may have violated state or federal laws by making personal investments based on privileged information and may have influenced fund managers to invest in companies in which he held personal stakes. The report cites 11 incidents of questionable investment activity between 1997 and 2002.
Investigators will not release the names of other plan officials under investigation; Mr. Taggart would not comment on whether any action has been taken against them. Ken Israel, Salt Lake City district administrator with the SEC, would not confirm or deny that any investigation is being conducted.
Managers not named
The external money managers named in the report were not identified. Mr. Taggart said officials at those firms will be interviewed as part of the investigation.
Francis M. Wikstrom, Mr. Cherry's attorney, said in a statement, "No statute, regulation or policy prohibits the board or the staff of the URS from personally investing in securities held by the URS so long as there is no harm to the URS or conflict of interest."
Auditor General Wayne Welsh's report said in October 1999, Mr. Cherry purchased 1,000 shares of Grey Wolf Inc., Houston, at $2.38 a share on the same day an externalmanager for URS purchased 200,000 shares of the same stock. A month later, Mr. Cherry sold all of his Grey Wolf holdings at $3.25 a share. The manager purchased Grey Wolf stock 12 more times, eventually accumulating 1,320,400 shares. The manager sold all its Grey Wolf shares between July and September 2000.
The report cited Mr. Cherry's actions as evidence that he could have used insider knowledge of which companies the pension fund's managers intended to invest in, hoping those investments would bump up the value of his personal stock holdings.
"It is common practice for all participants in this industry to discuss the investment merits of various securities based on their own personal beliefs," Mr. Wikstrom said. "No non-public, proprietary information was ever exchanged between the fund managers and the CIO."
In another purchase cited in the report, Mr. Cherry bought 1,000 shares of Align Technology Inc., Sunnyvale, Calif., in September 2001 and an additional 1,000 shares in December 2001. An externalmanager for URS began to purchase Align stock in March 2002; Mr. Cherry may have influenced the URS manager to invest in Align, the report stated.
Mr. Wikstrom said the manager previously considered purchasing Align stock and reconsidered after Mr. Cherry made a general inquiry about the stock. The manager then analyzed the company according to its own "complex decision-making formula and later made an independent decision to take a small position for all the clients in the managed fund," Mr. Wikstrom said.
Mr. Cherry lost $1,923 in the 11 investments under investigation, Mr. Wikstrom said, which proves Mr. Cherry did not benefit from insider information.
Utah legislators and officials at the state Division of Securities agree there is no evidence the retirement system incurred any financial losses as a result of Mr. Cherry's activities, said Mr. Taggart.
Circumstantial case
The case against Mr. Cherry is circumstantial at this point, said Mr. Taggart. It is based on the fact that those trades "were correspondent to fund trades. That is pretty significant," although it is not enough evidence to bring legal action against Mr. Cherry, he said. "We're not talking about Home Depot and IBM, we're talking about thinly traded small-cap companies."
Industry executives who know Mr. Cherry describe him as quiet and friendly, yet somewhat aloof.
Concerns about Mr. Cherry's personal investment activity first came to light last year, as legislative auditors began to review documents from an internal audit conducted by URS in 2000, said Mr. Welsh. During the audit, a plan official expressed her concern over Mr. Cherry's investment activity to Robert Newman, URS executive director, who was directing the audit, said Mr. Taggart. Investigators for the auditor general's office and the state Division of Securities would not identify the woman.
When questioned by auditors later, Mr. Newman said he brought the complaint to the system'strustees, who decided there was not enough evidence to launch a formal investigation, said Mr. Taggart. The Division of Securities is questioning URS trustees about Mr. Newman's explanation of events, he said.
Mr. Newman was cleared of any insider trading allegations by Mr. Welsh's office and is not being investigated by the Division of Securities or the SEC, said Mr. Taggart.
Influencing managers?
To prove that Mr. Cherry was guilty of influencing or intimidating fund managers into purchasing certain stock, investigators would need to show he could hire and fire managers, said Joseph P. Borg, director of the Alabama Securities Commission and previous president of the North American Securities Administrators Association, Washington. (Mr. Borg is not personally connected to the investigations, but offered his opinion based on his experiences.)
Mr. Wikstrom said Mr. Newman - and not Mr. Cherry - was "ultimately responsible" for hiring and firing outside investment managers, with advice from the URS board, staff and Callan Associates, the plan's consultant. Mr. Taggart, however, said Mr. Cherry had a "very vital role in selection," including evaluating the desirability of managers and presenting his findings to Mr. Newman for final approval.
"Bob relied heavily on Richard to decide who the fund managers would be," Mr. Taggart said. "If he (Mr. Cherry) wanted a fund manager gone, it would happen."
Brent Goodfellow, D-Salt Lake City, Utah House minority leader and member of the state house legislative audit subcommittee, said regardless of the outcome of pending investigations, the Utah State Retirement Board will re-evaluate its own policies on what constitutes conflict of interest activities for plan officials.
