FL Fund: Alliance Kept Mum about Analyst's Enron Warning

March 9, 2005 (PLANSPONSOR.com) - Despite warnings by its own analyst that Enron Corp. was about to explode, Alliance Capital Management Holding continued buying shares of the company for a state of Florida pension fund, jurors were told Tuesday.

Pension fund attorney Thomas Grady told a Florida state court jury in Tallahassee that directors of Alliance called the former energy trader’s management team “slimeballs,” but didn’t bother to share that viewpoint with the pension fund, according to a Bloomberg news report. The Florida State Board of Administration claimed in its lawsuit against Alliance, now going to trial, that it had lost $280 million when the Houston-based Enron imploded in a mega-accounting scandal in 2001(See  It’s Official: Florida Sues Alliance Over Enron ). Florida is also seeking more than $1 billion in unspecified damages.

Grady told jurors that despite the lack of communication with the Florida fund, Alliance analyst Annie Tsao cautioned in mid-2001 that “something was about to blow up” at Enron.

The fund, the Florida State Board of Administration, claims in its lawsuit against Alliance that it lost $280 million on its investment in Enron. “This case is not just about Enron,” Grady told jurors. “This case is also about the investment process that was promised.” The loss resulted from the failure of Alliance’s top portfolio manager, Alfred Harrison, to engage in rigorous research and scrutiny of Enron’s finances, the fund said in court papers.

Meanwhile, Alliance, which had been the pension fund’s investment adviser since 1984, has denied any wrongdoing, a defense its lawyer made to jurors Tuesday. Alliance, a New York-based company, fired by the fund in December 2001, turned around and countersued for unpaid investment management fees of about $1.1 million.

The pension fund also accused Alliance of not revealing employee Frank Savage’s role as director on the boards of both Alliance and Enron. Savage joined Alliance in July 1993. He was elected to Enron’s board in October 1999 and remained in that position until after the company declared bankruptcy.

More than $200 million of the fund’s losses came after Tsao downgraded Enron’s stock in an August 15, 2001 research note. The note followed the resignation of Enron CEO Jeff Skilling the day before, Grady said. Harrison made more than 20 additional purchases after the downgrade, Grady said.