Funds eye action against Bear Stearns

Several large public pension funds are mulling legal action against Bear Stearns Cos. Inc.

Massachusetts Treasurer Tim Cahill will consider legal action against the firm on behalf of the state pension fund if an investigation returns any evidence of securities fraud. Alison Mitchell, spokeswoman for Mr. Cahill’s office, said the treasurer is looking into the matter “as we would look at any investment that drops so significantly.” Potential losses to the $51 billion Massachusetts Pension Reserves Investment Management Board are estimated at $24 million, she said.

Meanwhile, New York City Comptroller William C. Thompson Jr. is considering a federal lawsuit against the company, spokesman Mike Loughran said in an e-mail. Outside counsel is reviewing “potential securities law fraud claims” for losses that could reach millions of dollars based on the 274,000 shares of Bear Stearns stock owned by the $127.9 billion New York City Retirement Systems, Mr. Loughran said.

New York state Comptroller Thomas DiNapoli, sole trustee for the $164.4 billion New York State Common Retirement Fund, Albany, also is “exploring all options,” including legal action, to protect assets in the fund, said Robert Whalen, spokesman for Mr. DiNapoli.

The Common Fund holds 427,785 shares of Bear Stearns stock and stood to lose as much as $30 million under terms of the original $2 a share buyout deal from JPMorgan Chase & Co. The offer has since been upgraded to about $10 a share. JPMorgan also agreed to buy 95 million Bear Stearns shares, or 39.5% of the outstanding Bear Stearns stock by April 8.

During the week of March 24, the $1.8 billion Wayne County Employees’ Retirement System, Detroit, and the $4.3 billion Police and Fire Retirement System of the City of Detroit filed an injunction to stop Bear Stearns from selling JPMorgan new shares to boost JPMorgan’s ownership and ease approval of the sale.

The original $2-a-share offer upset Bear Stearns employees and investors.

Bear Stearns stock had traded at as much as $159.36 a share on April 25, 2007, its 52-week high. Several law firms have filed lawsuits, alleging breach of fiduciary duty by Bear Stearns’ board and asking for an investigation of the merger talks process.

The law firm of Stember Feinstein Doyle & Payne LLC said it is examining fiduciary conduct relating to Bear Stearns’ ESOP, profit-sharing and 401(k) plans. Stember Feinstein is looking into whether fiduciaries of the plans knew that Bear Stearns was concealing its large exposure to CDOs and subprime mortgages that has rendered Bear Stearns common stock funds a risky investment for plan participants.

As part of its purchase proposal, JPMorgan said it will absorb the first $1 billion of potential losses associated with Bear Stearns, while the Federal Reserve Bank of New York will fund the remaining $29 billion.

If the deal is finalized, Bear Stearns Asset Management will become part of JPMorgan Asset Management, but just how BSAM would be integrated hasn’t been determined, said Mary Sedarat, global head of media relations of JPMAM. Larry Unrein, CIO of private equity at JPMorgan Asset Management, is leading the transition effort, said Ms. Sedarat. “We will be reaching out to their clients in coming weeks,” she said.

BSAM managed $30.5 billion as of Dec. 31, according to its website. Of that total, $14.7 billion was in fixed income, $9.25 billion in stocks, $4.7 billion in hedge funds, and $1.83 billion in private equity. Among its clients, 8% of its assets was managed for public pension fund clients, 14% for Taft-Harley clients and 22% for corporate pension fund clients.

That recent total asset figure doesn’t break out institutional assets. But as of Jan. 1, 2007, BSAM had $16.6 billion under management for U.S. tax-exempt institutional investors out of $41.4 billion in total assets, according to data provided to Pensions & Investments. BSAM’s assets would represent 2% of JPMAM’s pre-merger $1.3 trillion in assets under management, Ms. Sedarat said.

Pension fund clients of Bear Stearns Asset Management said they are staying the course for now.

American Airlines Inc.’s $9.1 billion pension fund has $230 million in active domestic all-cap value equities under management with BSAM and $40 million committed to the Bear Stearns Merchant Banking Partners II private equity fund, said William F. Quinn, chairman of American Beacon Advisors Inc., which oversees the Fort Worth, Texas-based pension fund. JPMAM manages $700 million in long-duration bonds and does currency overlay on international assets for the American Airlines fund, he added.

When interviewed, Mr. Quinn said he hadn’t heard anything yet from BSAM or JPMAM.

“From the standpoint of them managing money, we haven’t been concerned,” Mr. Quinn said. If the investment team responsible for the American Airlines’ portfolio moves over to JPMAM, he said American Airlines would continue to give them a chance to manage the money.

Illinois State Board of Investment, Chicago, invested $15 million in Bear Stearns Merchant Banking Partners II, said William R. Atwood, executive director of the $11.8 billion fund. The board hasn’t heard anything from BSAM or JPMAM, he added, saying the BSAM private equity group operates fairly autonomously from Bear Stearns.

Pennsylvania Public School Employees Retirement System, Harrisburg, has $300 million committed to Bear Stearns Merchant Banking Partners II fund and $150 million committed to Bear Sterns Merchant Banking Partners III, said Evelyn Tatkovski, spokeswoman for the $67.4 billion system. A system representative is on the advisory committee of both funds, giving it certain voting rights, said Ms. Tatkovski. System officials have been in contact with Bear Stearns officials since the announced JPMorgan deal, she said.