A Court Victory for Common Sense

Something big happened last week in Florida. It had nothing to do with the heat, the Heat, or hanging chads. Perhaps, as a result, it got almost no attention.On April 18, a jury of six people found in favor of Alliance Capital Management. The large asset manager had been accused by the state of Florida’s pension fund of losing hundreds of millions of dollars by buying Enron shares in violation of the terms of its management agreement.Money managers everywhere should have rejoiced over last week’s decision. Here was another example of a money manager being sued for poor judgment, essentially, and for stock-market losses. Had the firm settled, or lost, the precedent could have been devastating to the entire money-management business.The lawsuit accused Alfred Harrison, a well-regarded longtime money manager who is now retired, of not living up to his promise to invest in “intensively researched companies” and to concentrate on companies with “excellent balance sheets and superior earnings growth prospects.”The plaintiff had some pretty injurious material, including quotations of Mr. Harrison describing Enron as a “faith” stock, as well as saying that the company was on “a deliberate path not to give full information. Shame on me for not doing something on it.”Further, Alliance appeared to have close ties with Enron. A board member, Frank Savage, was on Enron’s board as well, and was described as a close associate of former Enron CEO and Chairman Kenneth Lay. The case enumerated the multiple warning signs of trouble ignored by Mr. Harrison, including top-level executive departures, write-offs, and insider selling. And, to top off the prosecution’s case, Alliance’s own research people were negative on the stock.How in the world did a Florida jury decide in favor of Alliance?Kudos go, certainly, to the attorneys at Clifford Chance, who represented Alliance. Considerable credit also goes to a firm called Analysis Group and their stable of experts, who provide testimony in cases like this one.Analysis Group provides economic, financial, and strategic consulting to corporations and law firms. Founded in 1981 by Martha Samuelson, who is still president and CEO, the company has a staff of 300 and a superb reputation.Approximately two-thirds of Analysis Group’s activities are focused on litigation. A good deal of it is securities litigation. Needless to say, this is a growth business. The collapse of Enron, WorldCom, Cendant, Lucent, Oxford Health Plans, and all the others has spawned a huge number of lawsuits that seek to return money to investors who got caught in the sink as the companies went down the drain.Analysis Group is not alone in this field – there are five or six others, including NERA Economic Consulting and Charles River Associates – but AG is the largest of the non-public firms. Sad to say, there is plenty of business to go around.As Ms. Samuelson points out: “The stock-market bubble had a lot of consequences. People got used to making money. When they lost it, it had to be because someone had done something wrong.”The Alliance case, in Ms. Samuelson’s view, was “particularly egregious. Alf Harrison had made so much money for them over the years.” She decries suits where the plaintiff “cherry picks” the losers in a portfolio, demanding restitution, even when overall, the manager has done well.According to Patricia Chadwick, Mr. Harrison had done very well for the Florida pension fund, earning returns of 300 basis points above his benchmark – even including the time that he owned Enron. Ms. Chadwick, who was recruited by the Analysis Group, became a central defense witness.She was formerly chief strategist for asset manager Invesco and knows the investment business inside-out. Ms. Chadwick now has her own consulting firm called Ravengate Partners.She spent hundreds of hours preparing testimony for the case. Apparently, her performance on the stand was brilliant. On cross-examination, when asked a yes-or-no question about investment process, Ms. Chadwick turned to the jury and gave a crystalline, 20-minute explanation of how Mr. Harrison chose stocks.It’s not rocket science. Ms. Chadwick’s description was so simple that the jury, which would most likely have been flummoxed by a lot of financial jargon, got the point.Ms. Chadwick spent the better part of a day testifying that Mr. Harrison had never neglected his standard investment process. Throughout the collapse of Enron’s shares, he continued to review the stock, to speak to management, run valuations on Enron’s properties, and in every way possible determine the worth of the shares.Mr. Harrison’s style is somewhat contrarian; in the past his approach had yielded more winners than losers. This happened to be a loser.At the end of the day, the jury apparently was convinced that the fault lay with the fraud perpetrated by Enron itself, and with the company’s accountants who didn’t spot it, not with Alliance Capital. Thankfully, the precedent is now established that a money manager is not expected to have superpowers that allow him to see through fraudulent numbers to the real ones lurking behind.This case was a victory for common sense, and for fairness. The moral of the story? It pays to defend defensible cases – just make sure your expert witnesses are truly expert.

A Court Victory for Common Sense

A Court Victory for Common Sense

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