Callan sued on conflicts

CHICAGO — Callan Associates Inc. is being sued for alleged conflicts of interest while it was general consultant for the $36.8 billion Illinois Teachers' Retirement System, Springfield, between January 2002 and March 2006.

The suit was filed on behalf of Patrick Patt on Aug. 25 in Cook County Circuit Court, Chicago, and seeks class-action status. Mr. Patt worked in the Illinois education system for 34 years before retiring served as a superintendent.

To have a defined benefit plan participant raise a lawsuit against an investment consultant is "pretty rare," said Richard Koppes, administrative officer at the National Association of Public Pension Attorneys, Sacramento, Calif.

"One theory is that participants generally lack standing because they can't show any economic harm," said Edward A.H. Siedle, president, Benchmark Financial Services Inc., Ocean Ridge, Fla., who investigates suspected abuses by consultants, money managers and brokers.

(In Mertens vs. Hewitt Associates, Kaiser Steel Corp. plan participants unsuccessfully sued the actuarial firm, arguing that it failed to disclose that the Kaiser plan wasn't adequately funded.)

According to Mr. Patt's suit, San Francisco-based Callan collected fees from investment managers attending educational seminars hosted by the firm at the same time it was "seeking, evaluating and recommending" potential investment managers for the pension fund.

Court documents show Callan charges managers $16,000 to $54,000 per year to be part of the Callan Investments Institute, billed as an educational forum for pension executives and money managers. Callan College, with separate classes for pension executives and money managers, costs $2,500 per person per session, according to court documents. About one-third of Callan's annual revenue comes from these units, said Jennifer Strouf, one of the plaintiff's attorneys at McTigue & Porter LLP, Washington.

"Callan's receipt of monies from investment managers who may be bidding on TRS business or managing TRS investments puts Callan in conflict with its responsibility for reviewing the work of investment managers and recommending whether they are retained by TRS, and is a breach of Callan's duty of loyalty to TRS," according to documents from the suit.

Nancy Malinowski, a Callan spokeswoman, said the firm had not been served with a complaint and would not comment without reviewing its contents.

The Illinois Teachers' fund was not named as a defendant in the suit.

The pension fund paid Callan approximately $2.7 million in fees between fiscal 2002 and 2006. The fees included annual retainer payments and bonuses for each private equity partnership the system entered on Callan's recommendation, according to financial data supplied to Pensions & Investments by the system.

Mr. Patt contends Callan is liable to compensate the pension system for any profits made through its "fiduciary breach" and all losses suffered by TRS as a result, according to court documents.

This is not Callan's only pending legal dispute. A December 2005 lawsuit filed by San Diego City Attorney Michael Aguirre charges Callan with professional negligence in providing advice to the city's $4.1 billion retirement system. A trial is scheduled for January in San Diego Superior Court, said Bryan Vess, outside counsel for the city. The city is seeking more than $50 million in damages, Mr. Vess said.

Callan has filed a motion to dispose of the case, and that motion will be heard in October, Mr. Vess said.

At the Illinois Teachers fund, officials replaced Callan with R.V. Kuhns as general consultant earlier this year. Callan remains its real estate consultant until its contract expires on Sept. 30, said Eva Goltermann, TRS spokeswoman. A request for proposals was issued in May and finalists are expected to be announced this fall.

The potential for conflicts of interest at Callan was a concern for the system, but "it was not the predominant reason for the board to select R.V. Kuhns," Ms. Goltermann said, noting Callan's recommended asset allocation did provide good investment returns.

In Honolulu, the investment committee of the $9.9 billion Employees' Retirement System of the State of Hawaii will "deliberate or make a decision" Sept. 6 on RFPs it has received as part of its general consultant search, according to the committee's agenda. The system's contract with Callan expires at the end of the year.

Callan was under Hawaii's microscope in 2003 when an audit of the system found more than 85% of recommended money manager candidates and 100% of the managers chosen have disclosed financial relationships with Callan Associates.

"While not technically representing a conflict of interest, the motivation to recommend these particular investment managers warrants close scrutiny," the audit noted. (P&I, March 3, 2003).