MILWAUKEE Joseph Frohna, founder and chief executive officer of Cortina Asset Management, Milwaukee, resigned last month amid an SEC probe of a trade he made while a portfolio manager at U.S. Bancorp several years ago.
According to documents obtained by Pensions & Investments from two of the firms clients, the Securities and Exchange Commission notified Mr. Frohna last month that it will formally investigate a potentially improper trade he made when managing the First American Small Cap Growth Opportunities Fund in 2002, two years before co-founding Cortina with several other former US Bancorp portfolio managers.
SEC spokesman John Heine said he would neither confirm nor deny any investigation or notification; he also wouldnt discuss the nature of any charges.
Mr. Frohna was Cortinas small-cap growth portfolio manager. Roughly three-quarters of the firms $1.7 billion in assets are in that strategy.
Some clients contacted for this story said they are reviewing the developments. The SECs investigation appears to be of less concern than the absence of a lead portfolio manager, particularly one who has served as the architect of the small-cap growth strategy.
But at least one the $480 million City of Knoxville (Tenn.) Pension Fund has terminated Cortina.
According to minutes from a Feb. 8 board meeting, posted on the funds website, the board elected to search for a new small-cap growth manager because of uncertainty as to the investment style moving forward. Cortina had managed $30 million in a small-cap growth portfolio for Knoxville.
At the meeting, consultant Dan Holmes of Summit Strategies Group, St Louis, said Mr. Frohna had received a Wells Notice and was under investigation. Also according to the minutes, Mr. Holmes said he had learned that Cortina employees had asked Mr. Frohna to resign and planned to purchase Mr. Frohnas shares in the company.
Not a majority
Lori Hoch, Cortinas chief compliance officer who has taken on the CEO duties, said Mr. Frohna resigned on his own and that the boutiques other owners Cortina employees and investment bank Roth Capital Partners LLC have purchased Mr. Frohnas share of the business. She said Mr. Frohnas share was the largest share, but not a majority.
Calls to Mr. Frohnas home were not returned.
Neither Mr. Holmes nor Michael Cherry, executive director of the Knoxville pension fund, returned calls seeking comment on Cortina.
Ms. Hoch acknowledged that Cortina has lost clients following Mr. Frohnas departure but added that it hadnt lost any significant business. She declined to be more specific.
She said the small-cap growth strategy is in strong hands with portfolio manager Brian Bies, who co-managed the strategy along with Mr. Frohna. Messrs. Bies and Frohna also co-managed the First American Small-Cap Growth Opportunities fund at U.S. Bancorp before they left in 2004 to form Cortina, along with former U.S. Bancorp portfolio managers John Potter and Thomas Eck.
Ms. Hoch said Cortina is searching for a portfolio manager to replace Mr. Frohna.
Several other public pension funds continue to use Cortina to manage small-cap growth equities, but they are watching the firms progress in finding a replacement for Mr. Frohna.
The $125 billion Florida State Board of Administration, Tallahassee, has placed Cortina on watch for a $125 million small-cap growth portfolio, said Michael P. McCauley, director of investment services and communication.
Also, the $3.2 billion Fire and Police Pension Association of Colorado, Greenwood Village, put Cortina on watch for a $47 million small-cap growth mandate last week, as reported in P&I Daily.
Officials at the $24 billion Employees Retirement System of Texas, Austin, are aware of Mr. Frohnas departure and will continue to monitor the firm, said Mary Jane Wardlow, spokeswoman. Cortina manages $102 million for Texas Employees.
The $525 million City of Tampa General Employees Pension also continues to employ Cortina for small-cap equities, according to officials for the plan; the dollar amount for the City of Tampa account was not available.
One investment consultant familiar with Cortina, who would not speak for attribution, said it could take up to several months before pension clients make final decisions on the firm. He said the firm could lose a significant portion of its institutional growth assets because Mr. Frohna has helped the strategy post excellent performance and his numbers will be difficult to replicate.
Since its inception in October 1997, Cortinas small-cap growth strategy returned a compound annual 18.67%, outperforming the Russell 2000 Growth index by 15.72 percentage points, according to eVestment Alliance, Marietta, Ga., an investment performance provider. Over the three- and five-year periods ended Dec. 31, the strategy returned 12.62% and 11.8%, outperforming the index by 2.12 and 4.88 percentage points, respectively. For the one-year period ended Dec. 31, it underperformed the Russell 2000 by 0.84 percentage points.