Court Reinstates City Pension Fund Best Execution Suit

August 7, 2002 ( - A Florida appeals court reinstated a lawsuit by a Gainesville, Florida public employee pension plan against a former investment advisor for not getting "best execution" on the fund's stock trades.

The Florida First District Court of Appeal ruled that the Gainesville Consolidated Police Officers’ and Firefighters Retirement Plan could pursue its litigation against the former money manager, Montag & Caldwell. A trial judge had thrown out the city’s suit.

Gainesville’s suit charged that Montag never told city officials that it would execute the pension plan’s stock trades only after it had bought and sold hundreds of millions of dollars of stocks for Montag’s other institutional clients.

Also, the city complained, Montag’s practice of buying large blocks of stocks effectively drove up the shares’ price. That meant, officials alleged, that the pension plan ended up paying more for stock shares than other Montag clients whose trades were attended to before Gainesville’s orders.

Finally, Gainesville said it lost money on the sell side as well. Montag’s block-selling practices effectively drove the share prices down so the pension fund ended up getting less when the money manager executed Gainesville’s sales, the city charged.

The Need for Verification

Robert Kay, head of Global Securities Consulting Services, a London and New York-based consulting firm specializing in execution management, said it would be unusual for a money manager to put one client at a disadvantage by virtue of its equity trading practices. But plan sponsors still have to be wary, he said.

“What it does throw up is that – clearly – trading blocks of equities is a complex business and it supports the view that plan sponsors need to have an ability to make sure that the trading that is done on their accounts is being done effectively,” Kay said. “If you don’t have a verification process, it is all too easy, whether (it is being done) deliberately or not, to find yourself disadvantaged.”