Florida Investigating Enron Stock Purchases in Pension Fund
Stung by $325 million in Enron-related losses, Florida lawmakers Thursday began examining why the state’s pension fund kept buying the ill-fated energy stock late last year despite signs that the company was in deep trouble.
The fund’s Enron loss is the largest for any governmental agency, and Florida officials are especially interested in the actions of money manager Alfred Harrison of Alliance Capital Management Corp., who bought 2.7 million shares of Enron stock for the pension system in October and November. The purchases came as the share price dropped from $22 to $9, Enron disclosed huge losses and federal regulators started a probe.
Harrison has business ties to an Enron board member, prompting lawmakers to wonder whether the connection influenced the purchases, said Rep. Mark Flanagan, a Republican from Bradenton who chairs the 10-member select House Banking Committee, which is holding hearings on the pension system. Flanagan said he also wants to question whether Harrison was dumping Enron stock from a private mutual fund he controlled at the same time he was loading up on Enron for the state. The questions were prompted by Alliance Capital’s financial reports.
“We are very concerned about the actions of this investment manager and what appears to be a major conflict of interest,” said Flanagan, who also is an investment advisor.
“Everybody, even the little old lady who dabbles in buying and selling stock, knew that Enron was in big trouble,” Flanagan said. Harrison could not be reached for comment. A spokesman for New York-based Alliance Capital said the firm was fooled by the company’s glowing financial statements.
“We believed Enron’s management and we believed they audited their financial statements and obviously, it appears that neither of them were accurate,” spokesman John Meyers said. “It seems clear that like a lot of other investors, we were misled.”
Meyers said it was “absolutely untrue” that Harrison was dumping Enron for his private clients while purchasing it for the state. Even with the Enron losses, Harrison earned a 1,513% return over 17 years as a money manager for the pension fund--better than the 997% return of the Standard & Poor’s 500 over the same period, Meyers said.
The select committee held its first hearing Thursday.
“Our goal is to uncover any inadequacies of the Florida retirement system and whether anybody is to recover the $325 million and put it back,” Flanagan said.
The Florida loss amounts to only one-half of 1% of the pension fund and doesn’t threaten the savings or retirement for 650,000 state government workers, officials said. Still, the Enron transactions have sent waves of consternation through Tallahassee, the state capital.
Based on the size of the loss, state officials have petitioned to become the lead plaintiff in a massive civil suit filed against Enron in Houston. The state attorney general has issued subpoenas to Alliance Capital as part of an Enron-related racketeering investigation, and Gov. Jeb Bush has suggested filing a civil suit against the investment firm. Harrison was fired as a contract money manager handling a $3.3-billion slice of the $92-billion fund.
Although Florida sustained the largest single Enron-related governmental loss, it isn’t alone. The University of California is out nearly $145 million from the Enron collapse, as are the pension plans for Georgia ($127 million), Ohio ($114 million) and New York ($110 million).
According to State Board of Allocation records, Harrison began buying Enron stock in November 2000, when shares topped $82. The purchases continued through 2001, unabated by the sudden resignation of Chief Executive Jeffrey K. Skilling in mid-August.
More than 1.4 million shares were purchased in October, after Enron reported a $638-million loss for the third quarter and disclosed a $1.2-billion reduction in shareholder equity. The purchases also came after the company disclosed a Securities and Exchange Commission inquiry and as share prices slid from $22.82 to $12.23.
Harrison bought an additional 1 million shares in November--days after Enron had shocked Wall Street by disclosing it had overstated earnings by $586 million since 1997. By then, the share price was lingering at $9.
During the two months, Harrison collected more than $110,000 in commissions before selling the retirement system’s 7.6 million shares, at 28 cents each, on Nov. 30. Enron filed for Chapter 11 bankruptcy protection two days later.
Harrison’s purchases accounted for about $284 million of the retirement system’s $325-million loss from Enron, records indicate. Other managers also made investments for the system.
The sell-off and loss spurred Board of Administration officials to hold a Dec. 11 meeting with Harrison, who said he “made a judgment and he was wrong,” according to notes taken from the meeting.
Harrison told officials that, in hindsight, Skilling’s resignation was a turning point for Enron but said he continued to buy the stock because he believed the company was fundamentally sound. During the final days, he hoped a merger with Dynegy Inc. would turn things around. “If the Dynegy deal had gone through, they would have made a killing,” the meeting notes say.
But Dynegy backed out of the merger, and Harrison sold the pension system’s shares rather than risk getting nothing through bankruptcy, the notes say. Harrison said he was pleasantly surprised to get 28 cents a share “because at the time he though we might get 10 cents the way things were going,” the notes say.
Harrison agreed that the investment was a “blot on his record,” and Board of Administration officials terminated his contract Dec. 13. “His performance had been steadily declining, but Enron was the straw that broke the camel’s back,” said Lee Baldwin, the board’s investment communications manager.
During the meeting, Harrison also faced questions about whether his ties to Enron board member Fred Savage affected his decision to buy the company stock.
Harrison said he didn’t realize Savage was on the Enron board until a few weeks ago and that Savage, who sold life insurance products overseas, played no role in picking Alliance investments.
