Politics and the Pension Fund
So why, again, did the state sue Alliance Capital?
The agency, the State Board of Administration, previously had gone after companies for supposedly misleading statements but had never before sued one of its own outside managers. A verdict for the board of administration would roil the contractual relationships of money managers and their big institutional clients everywhere by making a money manager financially liable for a well-intentioned but dramatically unsuccessful stock trade.
MAKING A CASE: Attorney Guy Burns had a fight on his hands in his suit against Alliance. While most shareholder cases settle, Alliance wasn't about to, even though Burns claimed he had a strong case.
The state board is a major institutional investor -- the fourth-largest public fund in the country. Its $140 billion in assets, which now has climbed above the level reached in 2000 before the stock market bubble burst, is more than the entire Florida government spends over two years.
The board remains well ahead of its overall target returns (currently about 8%), and Wilshire Associates recently said the state pension fund has the highest ratio of assets to pension liabilities of any state pension fund in the country. It also happens to be the only Florida agency that writes its own checks instead of routing bills through the state chief financial officer.
In the years leading up to the lawsuit, the state board had put $378 million in the hands of Alliance Capital Management, a leading international investment company, to manage. In 17 years, Alliance multiplied the money tenfold, to nearly $3.7 billion for Florida. But that success didn't matter in 2002, when headlines were blaring over $300 million the pension fund had lost from Alliance's investments in Enron, a one-time high-flier that fell into bankruptcy. The board fired Alliance and sued for fraud, negligence and breach of contract.
The six-week trial before Leon Circuit Judge Nikki A. Clark looked like the kind of case both Bush administrations have railed against -- trying to get a jury to buy a legal theory concocted by lawyers after the fact by suing people who were doing a good job and were taking a calculated risk in an area where everything doesn't always go right.
Coleman Stipanovich, State Board of Administration executive director, insists politics didn't play a part in the decision to sue Alliance.
The board's chief counsel on the case was Guy Burns, a partner in the Tampa firm Johnson, Pope, Bokor, Ruppel & Burns. Part of its business is securities litigation, filing class actions against companies whose stock has fallen by looking for anything company executives might have said or done that could be a basis for a fraud or other damage claim. For example, the firm has sued Martha Stewart on behalf of stockholders of Martha Stewart Omnimedia on the claim that her insider-trading conviction hurt the company's stock price.
Most shareholder cases settle. In fact, asked to name the most recent shareholder-rights case he tried, Burns said he couldn't remember, because those cases rarely go to trial. The board's lawsuit against DaimlerChrysler, claiming Daimler-Benz and Chrysler misled investors by calling their combination a "merger of equals" instead of takeover, produced a $300-million class-action settlement. Burns wasn't involved in that one.
The 'V strategy'
Such a settlement in the Alliance case would have let the state board claim vindication, or at least victimhood. Headlines about the lawsuit at least stopped the inquiries of legislative committees in 2002. And, as board Executive Director Coleman Stipanovich said after the verdict, the lawsuit cost the state nothing because the lawyers worked on a contingency.
Stipanovich had been the No. 2 person at the board under Tom Herndon, who quit at the height of pressure over Enron and joined high-priced lobbying firm Southern Strategy Group. Stipanovich, brother of longtime Republican strategist Mac Stipanovich, was appointed to the job in mid-2002.
By then it was obvious that Enron was a fraud, covered up by its auditors, the once-revered but now-defunct Arthur Andersen. But in 2001, bold investors viewed drops in the stock price as buying opportunities. That was the kind of opportunity that Alfred Harrison, the head of the Florida account at Alliance, built his reputation on.
He called it the "V strategy" -- buying stock in well-regarded companies as their stock fell, then taking profits as the stock climbed back up again. It was a bigger risk for a bigger return.
The strategy had worked with a lot of investments for a long time, but it didn't work with Enron. Just before Enron's bankruptcy filing, Alliance finally dumped Florida's 7.8 million shares, bought for as much as $78 a share, for 28 cents apiece.
Alliance's lawyer, Barry Richard, who won the case, says Florida's decision to sue was "shameful" and politically motivated.
Burns and co-counsel Thomas Grady of Naples claimed they had a strong case against Alliance. But the board had previously declared that Alliance was a fine manager. (When questioned later by defense lawyers about those evaluations, a board supervisor repeatedly responded, "I do not recall.") Burns and Grady developed the claim that Alliance's marketing materials implied the Florida portfolio would consist of stocks rated "1" by Alliance analysts. Enron was once a 1, but it was dropped to a 2, along with some of those other high-fliers. Burns argued that, under the investment "process" Alliance advertised, Enron should have been sold immediately. "Is it OK for a fiduciary to not tell the truth to its client?" Burns asked the jurors.
But the jurors didn't find enough evidence that the board had been misled and found in favor of Alliance. After all, the board's staff supposedly had been monitoring every purchase and sale of stock by Alliance for 17 years and didn't talk about being "misled" until the lawyers studied the marketing materials. "The stock market is the stock market," mused alternate juror Barry Epperson, a 22-year-old pizza delivery man who plays in a rock band.
Overall, the board is doing well in the stock market. But risk is part of that success. The board's strategy includes riskier and sophisticated investments along with diversification of investments and managers. In 2003, one of its investment managers, Liberty Partners in New York City, used about $174 million to take over virtually all of the stock and outstanding debt of floundering Edison Schools, the school-management company led by entrepreneur and erstwhile conservative icon Chris Whittle. Edison stock had fallen from about $37 to less than $2 at the time of the Liberty investment. (The stock chart in 2003 looked a lot like Enron's did at the end of 2001.) Today the Edison investment, says state board spokesman Michael McCauley, is still "unrealized," but Edison management "is actively working to build value in the company and realize a profit for the investment." But Edison recently lost its one Florida contract, with Miami-Dade schools.
Through Liberty, the Florida pension fund owns a variety of companies worth about $1 billion in all, ranging from bar code company Datamax Corp. in Orlando to NutTrade.com, which provides online trading of walnuts, almonds and other "tree nuts." Stipanovich, responding to questions from Florida Trend, says Liberty is performing better than average in its industry, but the Liberty relationship is being renegotiated. The state board is Liberty's only client.
The board also put $150 million into a leveraged buyout fund run by a California outfit called Pacific Corporate Group. But the board's involvement is being renegotiated because its key man at PCG appears to be leaving. Stipanovich says the investments PCG made are sound.
Since 1987, the board's investment has grown to about $3.5 billion in these and other leveraged buyout funds, distressed debt and venture capital pools, a category called "alternative" investments. A top performer has been an investment pool managed by the Carlyle Group, a sought-after manager with which Jeb Bush's father has connections. The state board's alternative investments as a whole, though, have fallen short of their goal every year (but haven't lost money overall).
Stipanovich says "the verdict is still out" on alternative investments, which take time to pay off, but "I'm still convinced it's the right thing to do." He says he added more outside managers to diversify the investments and spread the risk.
Publicity-shy Stipanovich, who says "we want to be in the back row of the classroom and hope we don't get called on," did make one political foray last year. He joined Jeb Bush and representatives of Enterprise Florida and the Scripps Research Institute to promote venture capital in Florida. "The venture capital community," he told the group, "has been asking, 'If Florida venture capital is so great, why aren't the Florida pension funds invested?' " He promised to put another $500 million over three to five years into venture capital, but not necessarily Florida venture capital firms.
But Stipanovich says he never committed to favoring Florida firms, which would have breached a long tradition of rejecting the inclusion of political and social goals in the selection of investments. "We said we would have a Florida focus at Grove Street (Advisors)," one of the venture-fund managers. The firm agreed to give Florida venture funds "an ear" when they might not otherwise get in the door. But Stipanovich said the proposals "have to be nationally competitive... no exceptions." He said Grove Street has put $15 million into one Florida firm.
A feisty opponent
Stipanovich says the decision to sue Alliance wasn't political, either. "We did what we thought was in the best interests of the retirement fund of Florida," he said. "But I respect the jury's verdict."
The board gave up the right to appeal. In return, Stipanovich said he and the CEO of Alliance agreed before the verdict on April 18 that Alliance would give up its claim to $1.1 million in unpaid management fees and reimbursement of its legal fees, which Stipanovich said were "huge, and we're not talking a few million."
Alliance proved to be the kind of defendant few plaintiffs expect these days. Business defendants and their insurance companies settle to avoid the expense or the risk, and plaintiffs' lawyers know it. Alliance wasn't going to take the money-management industry down that road. They stood and fought, and they won.
In fact, the lawyer who won -- the lawyer who led the George W. Bush legal team in the Florida 2000 election cases -- called the case "political," designed simply to deflect blame for the Enron losses. "It is shameful," said Barry Richard in his closing argument, "that the SBA (State Board of Administration) would file the first case it has ever filed against a manager, against the best manager it ever had... It is shameful to rewrite history, to deny everything that you have said before you walked into the courtroom, just because you want to win a case."