Advanced Management President/CIO Resigns in Wake of Controversy

August 6, 2002 ( - Tom Allen, president and chief investment officer at Advanced Investment Management, has resigned amid a firestorm of allegations from at least three pension funds.

The pension funds, San Bernadino County (California) Retirement Board, the Minneapolis Employees Retirement Fund (MERF), and the Pennsylvania State Employee’s Retirement System (SERS), all terminated their contracts with the Pittsburgh-based investment manager following an analysis by consultant Ennis Knupp.  Advanced (whose acronym “AIM” should not be confused with the Houston-based AIM funds) has continued to deny any wrongdoing.

Triple Threat

First was the San Bernadino fund, which acted just four months after hiring Advanced. The California fund said it had determined that Advanced’s domestic equity trades resulted in a $55-million loss to the $3.2 billion investment pool for public employees – and has reportedly chosen a law firm to pursue legal action.

A week later, officials with the $1.3 billion Minneapolis Employees Retirement Fund (MERF) accused Advanced Investment Management of causing a $27-million loss by violating the fund’s investment guidelines. Advanced accumulated an estimated 400% leverage on MERF’s enhanced S&P 500 index account, MERF alleged. MERF had enjoyed a decade-long relationship with Advanced prior to that decision, but now says it is also considering litigation.

Advanced had been managing a synthetic enhanced S&P Index account for MERF, which represents 6,120 Minneapolis area public employees, since February 1993.  However, earlier this month MERF asked consultant Ennis Knupp & Associates to look into “unusual losses” in the Advanced-managed account in October and November 2001 and “unusual gains” for the two months following.  That investigation was ordered on the same date that Ennis Knupp’s other AIM client, San Bernardino County, notified the consultant that they suspected that excess leverage had been applied to their account, according to MERF.

Most recently, the Pennsylvania State Employee’s Retirement System (SERS) terminated its contracts with Advanced on July 24, citing “increased business risk,” according to Institutional Investor.

Advanced Statements

For its part, Advanced ( ) continues to maintain that not only were its actions within agreed-upon guidelines, but that it regularly disclosed positions with the funds in question.  In fact, Advanced noted in a prepared statement, “In early July 2002, AIM initiated discussions with MERF to discuss and review the account’s recent underperformance, as well as the current extreme market conditions.”

As for Allen’s departure, he noted in a statement, “Under the extreme market conditions we experienced recently, my decisions in applying our investment strategy produced significant under-performance for a number of our clients. The disappointing performance has caused some of our clients to raise questions regarding our abilities.  We believe that we managed all our clients’ accounts consistent with their investment objectives and within our permitted discretion. In addition, we note that our clients received regular disclosures and reports regarding the holdings and trading activity in their accounts from our firm and from their independent custodians.”

Bill Belko is the firm’s new CEO and chief investment officer, according to the firm.