ATLANTA - The head of Pryor, McClendon, Counts & Co. yesterday vigorously denied that his firm engaged in any improprieties in handling the bulk of trading last year for Atlanta's $1.3 billion fixed-income investment portfolio.
Malcolmn D. Pryor, chairman of the Philadelphia-based minority-owned firm, also suggested that at least some of the city's questioning of his firm may be racially motivated.
"People can raise their eyebrows at the amount of work we have done for the portfolio, but they could also see it as evidence that we have given the city some very good ideas," Pryor said. "Why is it that some start with the premise that when black people get the work, something is wrong?"
Pryor's comments follow the launching of an investigation into the investment portfolio this month by Atlanta Mayor Bill Campbell, who is black, after Campbell reviewed two analyses of the fund's activity in 1993. Campbell became mayor in January, succeeding Maynard Jackson.
The first analysis found that, exclusive of repurchase agreements, Pryor handled $ 6.82 billion of $8.79 billion of securities traded in the portfolio last year, or 77.6% of the total. This was almost 19 times that of the second most active trader in the portfolio, SouthTrust Securities, which handled $364 million, or 4% of the total.
A second report, written by Greg Biggs, an independent auditor, found that some trades were executed without documented bids taken from other broker-dealers, in apparent violation of city investment guidelines.
As of yearend 1993, the $1.3 billion portfolio comprised about $375 million from the city's General Employees Fixed Income pension fund, with the remainder distributed between aviation, water and sewer, and general operating funds.
"The concentration of trades in one dealer was surprising to me as was the apparent lack of bids, and we are now looking further into the situation to get a clearer picture of what happened," Campbell said in a recent interview. "These steps are being taken to reassure the public about the integrity of the city's investments."
The mayor also said that pending completion of the inquiry, Theresa Stanford, the city's longtime investment officer, will not manage the portfolio. Instead, he said, Michael Bell, the city's chief financial officer, is overseeing the investments.
The city's law department, its chief financial officer, and some outside consultants are conducting the probe, according to Angelo Fuster, the city's deputy chief operating officer. He declined to specify what firms had been retained.
City officials interviewed this week said that they are concerned about the high turnover rate of the portfolio and the apparent lack of bids.
In addition, they said, they have questions about the relationship between Raymond McClendon, Pryor's vice chairman and chief operating officer, and the city's investment staff.
McClendon, who joined the firm in 1990, was Atlanta's investment officer from 1977 to 1980, when he became director of the city's financial analysis and auditing department. He remained in the position, which sets overall investment strategy and manages day-to-day trading, until he left the city in March 1983. Stanford was hired by the department in 1977 and became investment officer in November 1983.
McClendon is also a close friend of former Mayor Jackson and served as his campaign treasurer in 1989. Jackson was mayor from 1974 to 1982 and from 1990 to 1994.
In addition to its primary role with the city's investment portfolio, Pryor McClendon has been a mayor player in Atlanta bond issues. In December 1990, the firm was the lead manager for a $319.2 million issue of Hartsfield Airport revenue bonds. The firm has also served on the management team of last October's $252.7 million Atlanta water and sewerage revenue bonds issue, and this April's $281.1 million of airport revenue bonds.
Pryor's chairman yesterday rejected any suggestion that the firm's work for Atlanta was inappropriate because of McClendon's employment with the city or his friendship with the former mayor. He noted that Pryor has been executing trades for the city's investment portfolio since 1988, two years before McClendon joined the firm.
"Ray knows the way the portfolio works - I think that should be seen as a plus rather than a minus," Pryor said. "Frankly, there seems to be an agenda that goes way beyond the performance of the portfolio, and that agenda is to discredit the former mayor, and to discredit a black firm with brains."
Debra Speights, a spokeswoman for Jackson, denied that he had attempted to steer investment portfolio work to Pryor McClendon.
"Mr. Jackson has never denied his friendship with Raymond McClendon," Speights said. "But he rejects any contention that he ever tried to influence, directly or indirectly, the handling of the investments."
Pryor said that the investment strategy advocated to Atlanta in 1993 by his firm featured frequent swaps of zero-coupon Treasury securities to take advantage of the steepness of the yield curve and falling interest rates last year. The strategy was also dictated by the portfolio's investment constraints, which generally limit holdings to intermediate-term Treasury securities and forbid sales that result in a loss.
Pryor also insisted that all the trades were authorized by city officials.
"When the client likes your ideas, what are we supposed to do - tell them you should give the business to someone else?" he said.
Angelo Green, the Atlanta official who supervised Stanford as director of the city's bureau of financial analysis, also took issue with the questioning of the share of trades in the portfolio executed by Pryor McClendon.
According to Green, a more proper accounting of trading activity should include repurchase agreements, or repos, which totaled more than $30 billion in 1993. under this accounting, Pryor McClendon executed only 18.29% of the trades, second behind Wachovia Bank.
"If you included the repos, you get a truer picture, and I don't think the Pryor numbers are out of line," he said.
Green also disputed the finding of the analysis that suggested portfolio activity violated city bidding procedures. According, to Green, the stipulation about bidding procedures cited by the Biggs report does not apply to transactions in which no new money is invested, such as swaps.
Swaps, which involve the simultaneous sale of a security before its maturity and the purchase of a replacement, are typically executed to augment yield or hedge against adverse interest rate moves.
Stanford, who Green said was on vacation this week, was not available for comment.
According to a report prepared by Cleveland-based Wyatt Asset Services Inc., management consultant to the city's pension board, the 8.1% return on the city's in-house fixed-income portfolio in 1993 was "in line with benchmarks."
Two city investment funds that have recently been turned over to outside managers, pension portfolios for the city's fire fighters and police officers, achieved higher returns last year, at 10.18% and 10.06%, respectively. However, the funds typically go out longer in maturity that the $1.3 billion in-house portfolio.
Pension fund managers interviewed this week say that given the in-house portfolio's relatively short maturity length and its concentration in Treasuries, the 8.1% return is not out of line.
They also said that although a portfolio turnover rate approaching 700% is somewhat unusual when compared to the broad universe of pension funds, it is not necessarily a sign of mismanagement or "churning," the unscrupulous use of trades to maximize profit.
"Riding the yield curve with swaps, and using strips to maximize youur duration may not be a bad strategy when there is a steep yield curve and falling interest rates, both of which were the case last year," said one Atlanta-based manager. "But it is a strategy that can backfire when those conditions change."
Another manager said that even with swaps, it is wise for a portfolio manager to shop around.
"I always have my people get three or more bids," he said. "And that is not because I think brokers are out to rape you, but because different brokers have access to different bonds, particularly in the strips market."