Money manager on firing line
State Enron probe now 3-pronged
BY JONI JAMES
jjames@herald.com
TALLAHASSEE -- For more than a decade, Minnesotan Al Harrison had plenty of freedom to manage billions of dollars of Florida taxpayers' money, and for good reason: He had a Midas touch for picking stocks.
The vice chairman of Alliance Capital Management was one of 40 money managers who handled investments for the state's public employee pension plan.
Over 17 years, Harrison and his Minneapolis-based team took state deposits totaling $344.1 million and grew them into a $3.57 billion jackpot using aggressive investing in domestic, large-company growth stocks. His style: Buy big chunks of low-priced stocks and cash out as the price rose. But that stellar performance dimmed in the last days of 2001, when Harrison's contention that Enron stock was undervalued proved painfully wrong.
Singlehandedly, the 64-year-old money manager's bad bets cost the Florida pension fund $283 million of the estimated $325 million the state lost as the value of its holdings in Enron stock and bonds plummeted. It was the largest Enron loss of any public pension fund -- and it cost Harrison the state pension account.
Now Harrison and his firm, which manages a total of $455 billion for different clients, are the focus of three Florida investigations by the State Board of Administration (SBA) that manages the pension fund, the attorney general's office, and a House of Representatives Select Committee.
Among the allegations: that a former Alliance executive serving on the Enron board of directors perhaps influenced Harrison's decisions; and that pension board bureaucrats should have stopped the Enron buys before the losses mounted.
Some critics have suggested that Gov. Jeb Bush, who chairs the pension board, might have influenced Enron purchases because of his family's ties to Enron Chief Executive Officer Kenneth Lay, who along with other Enron personnel and subsidiaries is credited with giving $6,500 to Bush's 1998 campaign. Bush and SBA staffers both say he played no role in the stock buying.
DUPED?
For all the speculation, documents released last week by the state pension fund -- coupled with common assumptions in investor-manager relations, the rules of aggressive investing, and the vast impact of Enron's collapse -- suggest investigators could deduce a far less nefarious or remarkable explanation months from now. Put simply: Harrison was duped, too.
``Alliance definitely blew this. They rode the stock all the way down,'' said James Cramer, founder of the financial website TheStreet.com. ``But [Enron] was the seventh-largest company in the country. A lot of people, including a lot of good managers, rode it all the way down.''
Major pension funds and their managers rarely make news. If managed well, the ebb and flow of the stock market is easily absorbed in the vast array of diversified assets.
For example, experts say Florida's pension fund probably lost about $1.5 billion in a single day last week when the Dow Jones Industrial Average fell 2.5 percent on Tuesday. That's about five times the amount it lost on its Enron holdings.
SMALL SLICE
Though Harrison managed one of the pension fund's largest active accounts, the money under his control was just 3 percent of the Florida fund's $96 billion in assets. The total $325 million lost from all Enron holdings amount to one-third of 1 percent of the fund.
By comparison, the second- and third-biggest losers lost fewer dollars to Enron, but similar percentages. The University of California Regents fund lost one-third of 1 percent. Georgia State Public Employees Pension lost one-fifth of 1 percent.
``It is kind of amazing to think, but in the scheme of things, $300 million isn't that much money in terms of the entire size of the pension fund,'' the governor marveled last week, minutes before proposing the SBA board sue Alliance if investigations turn up misdeeds.
``I want to know if there was more to this loss than just bad judgment,'' Bush said.
Alliance contends it lost money for the same reasons everyone else did. It trusted the accuracy of Enron audits by accounting giant Arthur Andersen, along with Enron executives' optimistic statements about the company's financial health.
``Given the information available to us at the time, we believed our investment decisions were reasonable. We believed Enron's management was providing accurate information. And we relied upon Enron's audited financial statements as accurate,'' said Alliance Chief Executive Officer Bruce Calvert in a conference call with analysts Thursday. ``It seems clear that we, like many other investors, were misled.''
Calvert said the Enron debacle has cost his New-York-based firm a second institutional client besides the Florida fund. And the firm is facing three lawsuits from investors in the mutual fund Harrison ran, Alliance Premier Growth Fund, because of Enron losses.
Calvert denied that Frank Savage, who retired from Alliance as a division chairman in August and who was a member of Enron's board of directors, played any part in investment decisions. Savage ``had no role whatsoever in decisions to buy, sell or hold Enron's shares at any time. In fact, consistent with Alliance's long-standing policy, he agreed to recuse himself from all discussions of Enron as a pre-condition to joining that board.''
DECLINES COMMENT
The firm has declined requests to make Harrison available for questions, and an Alliance spokesman declined to comment for this story. But Calvert's message last week was strikingly similar to the one Harrison delivered Dec. 11 when he flew to Tallahassee to face more than a dozen SBA staff members and two assistant attorneys general.
For more than two hours, according to notes compiled by SBA staff, Harrison answered questions about his acquisition of 7.6 million Enron shares starting in November 2000. Of particular interest were the 2.7 million shares bought after Oct. 22, 2001, when it became known that the U.S. Securities and Exchange Commission was investigating Enron.
The meeting came just nine days after Enron declared bankruptcy and just 11 days after Harrison angered SBA staff by selling all 7.6 million Enron shares at a huge loss despite having justified the holdings a day earlier in an e-mail to an SBA staffer. Records indicate SBA staff only realized Harrison had made the Dec. 30 sale, for 28 cents a share, when reviewing account statements several days later. The state had paid betwen $82 and $9 per Enron share.
The records of the meeting highlight the subjective art of picking stocks, even for the best and brightest money managers -- particularly when, as it later turned out, Enron's auditing told only part of the story.
SBA staff say they have yet to find evidence that Alliance violated its contract in making the Enron purchases. Alliance, however, was fired in December in part because of lack of communication after staff first raised concerns about Harrison's Enron holdings.
SEVERAL MEETINGS
According to the meeting's notes, Harrison's team met several times in 2001 with Enron officials. At one point, after CEO Jeff Skilling resigned in August, the stock began to drop, but Harrison accepted Enron's explanation that Skilling left for ``personal reasons.''
The bad news escalated in October. Enron's cash flow was hurting, contrary to accounting reports; the company's chief financial officer was fired; and the SEC launched its inquiry.
Harrison reassessed the company, but believed it still was strong and ``there was nothing about Ken Lay that gave the impression he was doing anything nefarious,'` notes indicate Harrison told state staffers.
Harrison made three final Enron stock purchases from Nov. 13 to Nov. 16 for $9.84 to $9.02 a share on news that Enron's chief rival, Dynegy, was seeking to buy the company. But by Nov. 30, a Friday, he was concerned Enron would seek bankruptcy protection and he wanted to be out of the stock by day's end, the meeting's notes say.
QUESTIONS ARISE
SBA documents show the state bureaucrats trusted Harrison, even as his team's performance began to slip in mid-2000, due largely to bad technology stock purchases. Starting in early 2001, the board staff moved from quarterly to monthly reviews of Harrison's performance, a standard procedure whenever one of the board's 40 money managers fails to meet expectations over several months. It's a first step in long-term assessment of whether a firm should be retained. ``Alliance had weathered the troughs before,'' said SBA Director Tom Herndon. ``We thought we were just riding it out.'' State staff traveled to Minneapolis to visit Harrison and his team, and came away impressed with Alliance's ``depth and breadth of knowledge,'' memos state.
The memos from the monthly reviews include scrutiny of technology and airline stock buys, but it appears that a closer look at Enron purchases didn't begin until Oct. 24, 2001, when an SBA staffer called Harrison's office to inquire. ``A stock that is falling when the company has accounting problems are almost always a bad time to buy,'' one staff memo said. Several phone conversations over the next month followed. Harrison told state staffers he believed Enron's business was sound and the stock had value, records show. Staffers took no action.
PAST SUCCESSES
``The SBA has never dictated or directed the specific portfolio management practices of our investment managers,'' says a written staff explanation of Alliance's Enron purchases.
``We hire outside managers specifically for their expertise, and to impose our will... would be contradictory to the point of hiring outside experts in the first place.''
Herndon, who has led the SBA staff for five years, said Harrison's success in weathering past down cycles kept staff at bay. In the past dozen years, even with Enron losses, Harrison had averaged yearly investment gains of 16.1 percent, compared to the 14.25 percent benchmark set by the board. Morningstar, the well-known financial information giant, says in the same time period, all large-company growth funds posted an average 12.55 percent annual return.
``This business is about deciding who is skillful and who is lucky. You don't make that judgment on a single month or quarter,'' Herndon said. ``For 17 years, he'd been a solid, skillful manager, so we give him a lot of leash.''
Says TheStreet.com founder Cramer, ``If the managers don't know when to sell, how is the bureaucrat supposed to know? To me this could amount to needless finger-pointing.'' |
