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Pension funds seek key role in Enron actions

Public retirement funds, burned by huge losses on Enron Corp, are pressing to play a lead role in the shareholder lawsuits against the company -- and are hoping the fallout over Enron's downfall will help spur corporate governance reforms at other US companies.

Together, public pension funds are believed to have lost anywhere from $5 billion to $10 billion when Enron's stock collapsed, suffering an estimated 10 per cent of the total losses.

Florida, New York City, Ohio and other retirement systems that were hit hard have asked a federal court to appoint them lead plaintiffs in the shareholder suits against the company and its auditors. This would allow them to oversee the litigation.

It's unclear what kind of damages the retirement funds and other investors could recover in court, given that billions of dollars in shareholder value was wiped out in Enron's demise.

But public pension funds, with roughly $2.1 trillion in combined assets, are trying to flex their muscle in other ways to avoid future Enrons. They say the Houston energy trading giant's collapse should serve as a rallying cry to push through corporate governance reforms at publicly traded companies such as new rules on the independence of auditors.

"These guys are pretty unhappy," Alan Cleveland, legal counsel for the New Hampshire Retirement System, said of the public pension funds. "It really kind of sharpened their commitment to effecting certain structural changes in companies."

The New Hampshire fund, with assets of more than $4 billion, did not have significant exposure to Enron in its portfolio, Cleveland said.

GOING TO COURT

But Enron stock was held by many big pension funds, which tend to invest heavily in large corporations because their portfolios often mirror the make-up of major stock indexes such as the Standard & Poor's 500. This "passive investing" strategy, known as indexing, is considered a conservative and low-cost approach to managing money.

Among the biggest losers on Enron stock were the Florida state retirement system, which lost an estimated $306 million, and the New York City pension funds, with a loss of about $109 million. The two retirement systems have filed a motion together in US District Court in Houston asking to be appointed lead plaintiffs in the Enron shareholder lawsuits.

Another group of state pension funds -- Ohio, Washington state, Georgia -- also has asked to be appointed lead plaintiffs. Public retirement systems in the three states saw $250 million disappear in Enron's stock plunge, according to the Ohio Attorney General's office.

These funds are getting competition in the legal arena from the University of California, which also has petitioned to be named lead plaintiff. The university, which says it lost about $145 million on Enron, is represented by law firm Milberg Weiss Bershad Hynes & Lerach, one of the most aggressive shareholder litigation firms in the country.

While these big shareholders want to direct the Enron litigation, they are quick to say that their losses on Enron are small compared with the overall size of their portfolios.

The University of California, for example, said its Enron losses represent only 0.3 per cent of its $54 billion in assets. The losses do not damage the ability of its retirement plan "to meet its obligations to the beneficiaries," the university said in a statement last month.

MONEY MANAGERS

It's not only Enron and its auditors, Andersen, that are the subject of the retirement funds' wrath.

The Florida State Board of Administration, which oversees a pension fund for about 650,000 government employees, last month cut its ties with money manager Alliance Capital Management LP, which bought more Enron shares for the $95 billion fund last year as the stock was sliding. Alliance was one of about 70 money managers employed by the Florida fund.

At the center of the probe is Alliance's link to an Enron board member, Frank Savage, a former Alliance executive who now runs the Savage Holdings investment company in New York.

Savage did not respond to requests for comment from Reuters. An Alliance spokesman declined comment, citing pending litigation, but the firm has said previously that Savage was involved in client services in Africa and the Middle East and had no involvement in the investment process.

Pension funds tend to be more activist than mutual funds, which generally buy and sell shares much more vigorously and can simply cash out of a stock if they don't like the way a company runs its business.

Pension funds, though, tend to be long-term investors because of the "indexing" method they use, and many of them try to effect change through corporate governance reform, industry experts said. The California Public Employees' Retirement System, for example, is widely watched for its stance on corporate governance issues.

"Large pension funds own stocks forever," said Michael Calabrese, who studies pension issues at the New America Foundation, a Washington think tank. "The closer you come to indexing, the more you cannot vote with your feet by selling. It pays to invest in reforming the company's governance."

Pension funds say they hope the Enron situation will give a jump-start to calls for requiring publicly traded companies to appoint a majority of independent board members and proposed rules that would make auditors more independent of company management and more accountable to an independent audit committee.

Another issue that could gain steam is a proposal that companies would have to change auditors every seven years to minimise conflict of interest concerns, said Patrick McGurn, director of corporate programs at Institutional Shareholder Services, a Rockville firm that advises large shareholders including pension funds.

"That's an idea that didn't have a lot of credibility until a few months ago." McGurn said. "I see that concept picking up more and more following these days."

Pension funds say they have pushed for corporate governance reforms long before Enron's collapse.

"One does not want to get in the 'I-told-you-so' mode, but it certainly gets tempting, said George Kim Johnson, general counsel for the Colorado Public Employees Retirement Association.

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