Callan Associates Inc., San Francisco, "lied" to clients about its relationship with former brokerage affiliate Alpha Management Inc. so the firm could earn $54 million in fees for providing financial services to Alpha's new owner, BNY Brokerage Inc., according to court documents filed Sept. 21 by the City of San Diego.
The documents charge that Alpha was never owned by Callan but, instead, was owned by Ronald Peyton, Callan's president and chief executive officer, through a family limited partnership. The suit alleges Mr. Peyton's ownership was never disclosed to clients, including the $4.45 billion San Diego City Employees' Retirement System.
However, Callan disclosed in a 1997 addendum to its Form ADV that "the sole shareholder of Alpha Management Inc. is the second largest shareholder of (Callan)" — who was Mr. Peyton.
Paul Renne, an attorney at Cooley Godward LLP, San Francisco, which is representing Callan in the lawsuit, said Alpha had been transferred to Mr. Peyton's family limited partnership to "comply with the regulations for a brokerage firm being connected with Callan."
Mr. Peyton, he said, was the only registered representative among Callan's consulting staff.
But San Diego officials claim Callan failed to adequately disclose the unit's ownership so Callan could pocket $54 million in fees for providing financial information about its clients to BNY, a subsidiary of The Bank of New York, the documents charge. Callan represented that the payments were proceeds from the sale of Alpha.
"The reason Callan lied regarding its relationship with the brokerage firm was so that Callan could deny a conflict of interest existed as a result of it simultaneously rendering services to (and earnings fees from) two conflicting constituencies": a brokerage firm and pension clients, the suit said. "Callan realized it couldn't pull the trick off without denying and recharacterizing its service relationship with the brokerage firm," according to the lawsuit.