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July 28, 2003 at 08:00 PM
NEW YORK (HedgeWorld.com)–A lawsuit filed by Middlesex Retirement System, Billerica, Mass., against Mellon Financial Corp., Pittsburgh, centers on the familiar problem of valuing fund assets, in particular options, but it could result in new standards regarding the responsibilities of custodians versus pension trustees.
This is a hot button right now, raising the issue of gross negligence, said Thomas Hickey III of Kirkpatrick & Lockhart LLP, Boston, a lawyer who represents public employee pension funds. Public pension trustees typically do not have investment training, but they might find themselves with personal liability for losses suffered by the retirement system, he suggested, speaking at a hedge fund symposium in New York organized by the Strategic Research Institute.
The combination of boards lacking investment background yet being subject to potential liability complicates hedge fund allocation decisions, and this case might make trustees even more concerned about investing with managers that use non-traditional or unfamiliar instruments.
Trustees have been asking about hedge funds in the past three years because they heard about such investments from their consultants, in Mr. Hickey’s experience. He has prepared reports for clients on what a hedge fund is and what to look for in making investment decisions, emphasizing the issue of gross negligence.
Option Trading Losses
Middlesex hired Cambridge Financial Management, Wellesley, Mass., in 1998 to run a currency hedge portfolio. Pension officers became aware of a loss of US$36 million or more after the fund manager, James Kneafsey, died in late April this year.
Previous reports from Mellon, the custodian, had valued assets at around US$40 million. But a statement after Mr. Kneafsey’s death showed less than US$2 million left in the fund. The losses arose from foreign currency options contracts.
