No breathing easy for Alliance

NEW YORK — Alliance Capital Management Holding LP is poised to turn the corner on its mutual fund trading problems, but its institutional unit, AllianceBernstein Institutional Investment Management, might yet run into a brick wall with clients.

Despite its groundbreaking settlement with regulators announced on Dec. 18, Alliance executives might have to rewrite their cleanup script because of reports that Vice Chairman Roger Hertog, head of institutional client sales and marketing who came to Alliance with the firm's acquisition of Sanford C. Bernstein Inc. in 2000, might have been in the loop on the company's market-timing arrangements.

The allegations against Mr. Hertog might also force pension fund executives — who generally have been content to put the scandal-tainted money manager on watch rather than terminating Alliance — to get tougher.

So far, Alliance Capital has depicted its ethical lapses as a problem of its mutual fund business, dominated by the free-wheeling, growth-investing Alliance side of the company. At a Merrill Lynch conference last month, Lewis A. Sanders, Alliance chief executive officer and a Bernstein veteran, said his company's "retail mutual fund business must be restructured, repositioned, and its culture remade entirely."

The solution the company has seemed to offer was a takeover of management by the disciplined, centralized Bernstein corporate culture.

The possibility raised by recent news reports that a top Bernstein official might have strayed from the fiduciary path would roil waters that the company's regulatory settlement with Eliot Spitzer, New York attorney general, and the Securities and Exchange Commission might otherwise have calmed.

"These allegations are very disturbing," said Michael Rosen, principal at consultant Angeles Investment Advisers LLC, Santa Monica, Calif., because they suggest Alliance's problems go to the very top of the organization.

John Meyers, Alliance spokesman, said the company declines to comment about the reports on Mr. Hertog that have been published in The Washington Post and The Wall Street Journal.

Alliance's decision to stuff its executive suite with Bernstein veterans has played on the enormous respect pension fund executives have for Messrs. Hertog and Sanders, as well as the culture of servicing institutional clients that they helped build. Out went the entire lineup of Alliance mutual fund veterans, including John D. Carifa, president and chief operating officer, and mutual fund distribution chief Michael J. Laughlin. In their place came a collection of Bernstein officials, including new COO Gerald M. Lieberman and new mutual fund chief Marc O. Mayer.

One ex-Bernstein executive figured the moves met one goal Alliance Capital had when it bought Bernstein: to introduce a more structured, disciplined management system over its operations.

Some pension fund officials have seemed sympathetic to the idea that the money manager's woes are more of an Alliance problem than AllianceBernstein's. In announcing a Dec. 15 decision to put AllianceBernstein on watch for now, the $157 billion California Public Employees' Retirement System, Sacramento, lauded Mr. Sanders for swiftly and decisively "purging the organization of all employees who failed to live up to their fiduciary duty."

In the same release, Sean Harrigan, CalPERS board president, said he remained troubled by a report published Dec. 12 in The Washington Post that the company's top remaining executive from the Alliance side, Chairman Bruce Calvert, might have known about Alliance's alleged market-timing arrangements. Mr. Harrigan didn't mention Mr. Hertog, even though the same article had suggested Mr. Hertog was aware of those arrangements as well. AllianceBernstein manages $1.4 billion for CalPERS.

Mr. Harrigan wasn't available for comment, but spokesman Brad Pacheco said, "The issue of Mr. Hertog is unresolved" and CalPERS is "concerned with any public accounts of any person who might have known about alleged market timing." Mr. Pacheco stressed it would be March before CalPERS trustees would make a final decision on Alliance.

If evidence mounts that Mr. Hertog knew about the company's market-timing arrangements, that could raise the hurdle pension executives would have to clear in opting to stick with the Alliance group.

So far, the reaction by institutional investors has remained fairly measured, in contrast to what happened when Boston-based Putnam Investments became the first money management giant to face civil charges from regulators in the industry scandal that erupted in early September. Big pension funds practically tripped over each other terminating Putnam, tagging the company with outflows that exceeded $30 billion in institutional and retail money in little over a month.

Some public pension funds say they will stick with Alliance despite the reports on Mr. Hertog. Rhode Island Treasurer Paul J. Tavares, through spokeswoman Stephanie Sheehan, said he was already aware of the information about Mr. Hertog contained in press reports, and he stood by earlier statements praising Alliance for being "very forthcoming."

Others expressed concerns, but were clearly hoping to keep Alliance in their manager lineups. Thomas Mann, director of the $4.7 billion Wyoming Retirement System, Cheyenne, said Alliance has been "far and above our best manager" for the past 20 years or more. Alliance manages $633 million in domestic large-cap growth equities for Wyoming, and another $958 million in fixed income.

Mr. Mann said the reports about Mr. Hertog are "certainly a concern," and if true he expects the company to let Mr. Hertog go. But Alliance is a huge, decentralized organization, and Mr. Mann said his people are very happy with the long-term relationship they've had with the investment professionals in Alliance's Minneapolis office who manage the Wyoming funds.

Still other pension executives said they intend to pursue the matter. "This will require some investigation on our part," said Robert Woodard, chief investment officer for the $9.4 billion Kansas Public Employees' Retirement System, Topeka. "Obviously it raises the question of who knew what and when."

But Mr. Woodard figured the ongoing negotiations between Alliance and both state and federal regulators had limited the money manager's scope for publicly responding to allegations. With the Dec. 18 settlement, he said he now expects to have more in-depth discussions with the company.

Investment professionals say they would be very surprised to learn that Mr. Hertog has let investors down in this matter, noting his decades-proven reputation for vigilantly protecting their interests.

"Lew and Roger wouldn't stand for any funny stuff. They would always do what's right for the clients," said one ex-Bernstein employee who worked with them for many years.

Still, if the allegations stick, then Mr. Sanders has no choice but to fire Mr. Hertog, despite their collaboration of more than 25 years, said another Bernstein alumnus.

If Mr. Hertog were forced out, the enormously respected Mr. Sanders could well see his reputation tarnished as well. Angeles Investment Advisers' Mr. Rosen said if Messrs. Calvert and Hertog prove to have known about the market-timing arrangements and Mr. Sanders didn't, then the question is why didn't the CEO know.

Should Mr. Hertog leave the company, then the comforting "Bernstein triumphant" scenario for Alliance's management team would evaporate, leaving the company facing tough questions about how to fill the gap, industry watchers said.

The company is filled with capable people who could eventually replace Messrs. Sanders and Hertog, but for the next few years "there's definitely a hole at the next level," said one of the ex-Bernstein veterans. Among the potential successors for Mr. Hertog, he figures Mr. Mayer would be the most likely heir apparent, while Seth J. Masters, chief investment officer for style blend services at AllianceBernstein, at 45, has a good shot at vying for Mr. Sanders job.