O.C.’s PairGain Probing Broker’s Unauthorized Losing Trades
In a case that could further rock an already shaky corporate money management world, PairGain Technologies Inc. said Friday that a broker managing one of its investment accounts has lost $15.9 million through unauthorized trading activity.
Charles Strauch, chief executive of the fast-growing telecommunications company, stressed that the loss came from investment funds rather than operating cash and will not jeopardize the company or result in layoffs or other belt-tightening actions.
“In fact, we expect that even after accounting for this loss we will post a profit for 1995,” he said.
PairGain officials declined to discuss the nature of the unauthorized investments that led to the loss, but said the broker handling the trades violated a written policy limiting investments to low-risk U.S. Treasury notes.
“We know he was familiar with the policy because he helped us review it when it was first approved by the board in October, 1994,” Strauch said.
Strauch refused to identify the money management firm or the broker involved, citing an ongoing internal investigation.
PairGain has notified officials of the Nasdaq market, where its stock is traded, but has not complained to law enforcement agencies.
A so-called forensic accountant has been hired to track the offending transactions and prepare a comprehensive report, Strauch said.
If losses are tracked to investments in derivatives--securities whose value is linked to an underlying market index--the PairGain case would become one of several that have exploded in recent years.
In the largest derivative loss on record, former Orange County Treasurer-Tax Collector Robert L. Citron lost $1.7 billion, resulting in the county government’s bankruptcy almost a year ago.
In another case, Procter & Gamble Co. is suing Bankers Trust over a nearly $200-million loss the company contends it incurred because of unauthorized derivatives trading by the New York-based bank’s money management department.
In its suit, Procter & Gamble alleges that at least seven other large corporations lost hundreds of millions of dollars because of unauthorized trading by Bankers Trust. The bank has denied the allegations.
Bob Hoff, an Orange County venture capitalist who serves on PairGain’s board of directors, said, however, that unauthorized trading is unusual and difficult to detect.
“I’ve never been in a situation where a guy violated investment guidelines and just decided to do what he wanted to do,” Hoff said.
He said the company became suspicious last June because the returns being reported on typically low-yield Treasury-note investments were simply too good. Company officials wondered “how come he’s outperforming our other managers,” Hoff said. Officials now suspect that those reported gains might have been fabricated to conceal deep losses.
Strauch said PairGain intends to initiate legal action once its investigation is completed. PairGain had a total of $71 million in cash invested through several money managers, Strauch said, and still has $55 million cash in its investment funds.
Strauch alleged that the losses were concealed from the company until last week, and that a preliminary investigation shows that invoices and investment reports that PairGain received from the broker were falsified.
Strauch said that company officials spent most of Friday in meetings, first on a conference call explaining the situation to institutional investors and market analysts and later meeting with the company’s 400 employees to assure them that PairGain’s future is not threatened by the loss.
“I told them that, despite this, business has never been better,” he said.
For the first nine months of 1995, the company reported a record profit of $11.3 million, or 68 cents a share, on sales of $72.6 million.
As word of the investment loss began circulating Friday, some investors began dumping shares and the value of PairGain’s common stock dropped by $1.25 to close at $49.125.
