Pension Manager Charged

NOVEMBER 1998 - Mismanaged Funds Says SEC - According
to the Securities and Exchanges Commission (SEC), a Boston pension fund
manager, Bing Sung, has cost his clients $155 million by making
unallowed trades.

One
of these funds, the Commonwealth’s state and teachers’ fund, known as
the Pension Reserves Investment Trust (PRIT) Fund, lost just under $5
million.

Sung actually worked for
Rhumbline Investment Advisers which PRIT hired as an up-and-coming
local firm in 1992. J.D. Nelson, who owns Rhumbline, had brought Sung
aboard as his chief investment officer to run a quantitative strategy
that involved writing options on stock indexes such as the Standard and
Poor’s 500.

Sung had developed this
strategy while a partner with Harvard Management Co., which manages
Harvard University’s endowment fund. He was regarded as a shining star
in his field.

But it all came
crashing down this September 30 when the SEC, after a two-year
investigation, announced it had filed an action in Boston’s U.S.
District Court charging that between July and September 1996, Sung
increased the magnitude and riskiness of his trading beyond allowed
limits. In the case of PRIT, the complaint alleges that he wrote more
options than permitted, concealing his losses.

PRIT Earlier Alerted

PRIT
trustees had earlier been alerted to Sung’s over-zealous strategy and
had pulled its $250 million out of Rhumbline two years ago. Since that
time, PRIT officials have cooperated with the SEC in the investigation.

Nelson,
Rhumbline’s head, has agreed to pay a $10,000 fine to the SEC for
failing to adequately supervise the trades. Also, the firm agreed to
pay the SEC a $50,000 fine.

“I hired
somebody that was very, very, experienced in options trading, etc. and
we put our confidence in him. I was at the helm . What can I say,” said
Nelson.

Actually, it was Nelson who
first alerted PRIT that Sung had overstepped his loss limit of 4% of
the market value of the account.

PRIM
made extensive efforts to seek a claim against Rhumbline, but
Rhumbline’s insurance carrier was only required to pay the policy
limits ($1 million) to resolve all claims. Since AT&T, another
client, had much larger loses ($150 million), PRIT was at best only
able to negotiate a split of 40% to PRIT and 60% to AT&T.

The
SEC and its resultant publicity couldn’t have come at a worse time for
PRIT, which was reeling from a $2.3 billion loss when the market
crashed in August. “We had dropped Rhumbline two years ago and accepted
our loss on a fund which had earlier performed quite well,” said PRIT
trustee Ralph White. “We knew the SEC suit was coming down…we just
didn’t know exactly when.”

Clients Remain Confident

Rhumbline remains in business, managing over $3 billion in a conservative index strategy which mirrors the S&P 500.

Locally,
the MBTA is Rhumbline’s largest client, with $70 million of the T
pension fund under management. The Boston, Quincy, Plymouth County,
Norfolk County, Hampshire County, North Attleboro and Amesbury pension
funds have also allocated money to Rhumbline for management.

Fund
trustees remain confident with Rhumbline’s index fund management and do
not fault J.D. Nelson for Bing Sung’s trading violations.

“I’ve
known J.D. since his early days at the State Street Bank, when he was
in charge of the public funds master trust division,” said John “Jack”
Gallahue, executive director of the $1.6 billion T Fund. “He’s very
professional in his work and a pleasure to be associated with.”

“Rhumbline’s
previous experience with option bets did not involve us,” said Boston
Retirement Fund trustee John “JJ” Jennings. “It’s my understanding that
style of management only involved PRIT and AT&T. J.D. Nelson runs a
class shop… I know the experience with Bing Sung has caused him
tremendous personal grief.”

George
“Fred” McCray of the Quincy Retirement Board also expressed confidence
in Nelson. “Rhumbline has exceeded its benchmark and has been right on
target with its earnings projections,” he said. “We’ve never had a
better manager when it comes to both service and performance. As far as
I’m concerned, Quincy has full confidence in Rhumbline.”

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