Florida Community Mulls UBS Court Suit

May 3, 2004 (PLANSPONSOR.com) - Officials in Coral Gables, Florida are now deciding whether to file suit against UBS AG's (UBS) Financial Services over its role as consultant to the $200 million fund.

UBS, known as PaineWebber during part of its tenure as adviser to the Coral Gables Retirement System, was fired in March after concerns were expressed that the firm’s advice may have led to big losses in the fund, Dow Jones reported.

Word about potential litigation by the South Florida city comes as the U.S. Securities and Exchange Commission (SEC) continues its probe into possible conflicts of interest in the pension consulting business (See  SEC Looks At Consultant, Pension Fund Relationship ). It also follows disclosure that the city of Chattanooga, Tenn., has hired an investigator to review the way UBS and Morgan Stanley (MWD) acted as consultants to its $180 million Tennessee pension fund in past years (See Chattanooga Probing UBS, Morgan Pension Consulting ).

The Coral Gables fund has voted to sue, but is waiting for approval from the city council. Concerned about the possibility of an ugly legal battle, the city turned to a lawyer to look into whether the fund should proceed, according to the attorney hired for the task, Miami Beach lawyer Stephen Cypen.

For its part, the Coral Gables fund contends that UBS should have been more vigilant in selecting firms that managed money for it, and prevented them from making overly risky investments.In particular, city officials said, UBS should have advised it to reduce exposure to stocks during 2001 and 2002, according to minutes of a special meeting of the retirement board on March 26. Another “huge error” the firm made, according to the minutes, was to recommend in 2000 that the fund beef up on growth stocks and cut back on value stocks in its portfolio, Dow Jones reported.

“PaineWebber had a fiduciary duty to the board to make sure that the investments were consistent with what were appropriate aims and objectives and they failed to do that,” according to the minutes. UBS spokesman Peter Casey said the firm believes the retirement board’s initial claim to be “entirely meritless,” and said UBS will “vigorously defend it if it is brought.”

“We welcome the city commission’s decision to appoint a special counsel, and we look forward to the opportunity to present the facts to this individual,” Casey said.

Cypen and other Florida lawyers say that there’s a growing concern among their retirement-fund clients about possible conflicts of interest in the pension consulting business. Concerns range beyond those specific to the Coral Gables case.

UBS was involved in the only publicly known settlement related to conflicts of interest in the pension consulting business. In 2002, UBS paid $10.3 million to the Metropolitan Government of Nashville and Davidson County after reports found conflicts in the way the firm acted as consultant to the city pension fund.

Alleged conflicts by consultants can take several forms, but they all come back to the powerful influence consultants wield over investment officials at pension funds. These officials – mostly at public funds – rely heavily on their consultants as the gatekeepers who tell them which money managers to hire. In turn, the argument goes, money managers feel pressure to “pay to play,” or give kickbacks of various forms to consultants in return for recommendations to pension boards.