The proxy fight at Compass Bancshares may be over, but controversy still lingers around dissident director Harry B. Brock Jr.

The American Banker has learned that Mr. Brock and one of his sons were organizing a hedge fund to invest in bank takeover targets at the very time Mr. Brock was preparing his unsuccessful attempt to wrest control of the Compass board in order to sell Alabama's fourth-largest bank to an out-of- state acquirer.

Mr. Brock says he has been careful to observe all the regulations relevant to the proposed fund, which is structured as a private placement limited partnership. But in a telephone interview last week, he also acknowledged the potential for a conflict of interest in light of his continuing role as a Compass board member who might be privy to some of the bank's acquisition plans.

Compass, which has $9.1 billion of assets, has been an active acquirer of community banks in Texas and Florida. The Birmingham-based bank also services a network of about 800 correspondent banks in the Southeast and Southwest, a network Mr. Brock helped establish as Compass' founder.

"There's a potential conflict of interest," said Compass general counsel Jerry W. Powell. "Whether there's an actual conflict of interest I can't tell you, because we never received enough information about what their plans were.

"Our objection, of course, would be to using any information they acquired through Compass Bank, because our customers would be affected," Mr. Powell added.

Mr. Brock is listed as an adviser in the as-yet-unnamed fund's preliminary business plan. His son, Harry B. Brock 3d is the general partner. The younger Mr. Brock, known as "Buck," is also a former Compass officer, having resigned from the bank last August.

"Obviously, I would have to keep my hands off" the fund's investments, the elder Mr. Brock said, "maybe even to the extent that I wouldn't have anything to do with helping him (Buck Brock) capitalize the company.

"I would never advise him to buy into a company, anyway, that would involve any information I had received as part of my involvement with Compass."

Buck Brock conceded in a telephone interview last Thursday that he might have to drop his father as the fund's adviser. "That's part of the final decisions I have to make in the next couple of weeks," said the younger Mr. Brock.

Some documents relating to the hedge fund were gathered as evidentiary material during a court case that Mr. Brock initiated against Compass in the course of his unsuccessful proxy challenge. They include memos and letters written by Mr. Brock and his son, as well as the preliminary business plan.

The earliest reference to the fund dates back to late October, when Mr. Brock was in Buenos Aires at Compass' expense attending a convention of the Chief Executives Organization, an alumni group of the Young Presidents Organization.

Mr. Brock, who had been Compass' CEO for 18 years until he retired in 1989, mentioned the fund in a short speech to the gathering. According to a handwritten draft of the talk, Mr. Brock said, "My son and I are thinking about starting an investment fund whose primary purpose is to identify (target banks) and buy stock in ones that fit our standards."

The documents also make clear that Mr. Brock, rather than his son, conducted most of the initial marketing for the fund by writing follow-up letters to people who attended the convention and other high-profile individuals, soliciting their advice and support. These included John M. Templeton, founder of the Templeton mutual funds; Thomas A. James, chairman and CEO of Raymond James Financial; CS First Boston bank analyst Thomas H. Hanley; and well-known bank investor Harry Keefe.

Mr. Keefe said he provided Mr. Brock with some technical information on how to set up a hedge fund, "but no investment advice.

"Harry Brock doesn't need any advice," Mr. Keefe said.

Mr. Brock said he had been pondering the issue of bank consolidation for some time when his son informed him early last fall of his plans to leave Compass. Buck Brock served 17 years with the bank, most recently as city president in Birmingham. He resigned on Aug. 8, citing "a deep-seated desire to have my own business."

Buck Brock said he did not, at that time, have a specific business in mind. "I did not feel it right for me to take the company's time" to develop or buy a business, he said.

It was the father who first suggested forming a bank hedge fund. Buck Brock said this was a revival of an idea the two had discussed several years earlier.

"It was natural that subject came up again," Buck Brock said. "Acquisitions have been around for a long time, but the regulatory and legal environment for that activity to truly flourish has never been there in the past," he added, referring to national interstate banking.

Meanwhile, at the same time, the elder Mr. Brock was engaged in his own campaign to convince Compass CEO and chairman D. Paul Jones Jr. that Compass needed to sell out to an out-of-state acquirer. Mr. Brock informed Mr. Jones on Sept. 26 that he would, on his own, solicit bids for Compass.

Mr. Brock said his son had no knowledge of his plans, an assertion corroborated by Buck Brock. "I made absolutely sure I didn't share any confidential information with Buck," Mr. Brock said.

In October, Mr. Brock delivered to the Compass board a $1.14 billion buyout offer from First Union Corp., Charlotte, N.C. Interestingly, First Union chairman and CEO Edward E. Crutchfield is a member of the CEO group that met in Buenos Aires. Mr. Crutchfield was not present at the convention, but Mr. Brock did cite the First Union chief's views on bank consolidation in his own talk.

When the Compass board rejected First Union's proposal, Mr. Brock launched his proxy challenge on Jan. 27.

The Brocks were still working on the hedge fund idea during much of this period. On Nov. 2, Buck Brock wrote Mr. Jones a letter informing him of his plans, noting, "Dad will be involved to the extent of an adviser/consultant to me through lending his considerable contacts and experience in the industry to the venture."

The younger Mr. Brock told Mr. Jones he saw "no potential conflicts whatsoever in the venture," since Compass did not operate any hedge funds of its own.

Buck Brock said last week he hoped the animosity generated by the recent proxy battle would not prejudice Compass against his venture. "I would expect everyone to behave in a professional manner and move on down the road," he said.

The younger Mr. Brock said he was still proceeding with his plans and expected to complete the documentation and legal work by the end of the month. Then, he said, he would proceed to raise between $10 million and $20 million in capital, soliciting the money from high-net-worth individuals.

The fund's preliminary business plan calls for a minimum investment of $1 million.

Meanwhile, Compass released first-quarter earnings Friday. Net income was $24.3 million, about even with the results a year earlier. Noninterest expense surged 19% to $74.2 million, largely because of costs related to the recent proxy fight.

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