The Arkansas Teacher Retirement System's board of trustees has signed off on using two securities monitoring firms to pursue a claim against a global investment manager that managed three funds in which the system suffered an estimated $700 million to $800 million in trading losses.
The claim will be against Allianz Global Investors and possibly its affiliates using the securities monitoring firms of Kaplan Fox & Kilsheimer and Bernstein Litowitz Berger & Grossmann.
Securities monitoring firms, which are law firms, are paid on a contingency fee basis, with payments determined by a judge and coming out of any settlements and awards. Potentially millions of dollars are at stake in successful cases that are large and complex and involve many retirement systems.
During their April 6 meeting, the trustees approved the redemption of three funds managed by Allianz Global Investors. The system redeemed about $550 million in May and experienced significant trading losses in these three funds, system Executive Director Clint Rhoden said. The system staff has been working with counsel to determine whether additional action may be required, he said.
The retirement system was invested in these funds of Allianz Global Investors, Structured Alpha U.S. Equity 250, Structured Alpha Global Equity 350 and Structured Alpha Global Equity 500, he said.
"We believe that there are actionable claims as a result of the significant losses that were experienced in those funds," system legal counsel Martha Miller told the trustees Tuesday.
The Arkansas Teacher Retirement System has experienced some of the highest losses in those funds and "we are making a recommendation for the staff to pursue and the board approve litigation on an individual basis -- not a class-action basis -- against Allianz and any of their other related corporations, if we can be successful in piercing the corporate veil," Miller said.
"We would recommend that we do so as quickly as we can because, as one of the largest investors, we want to establish the protocol, or the footprint or the precedent ... in how these claims are prosecuted," she told the trustees.
Board Chairman Danny Knight of Sherwood said, "Basically, what you are telling us in an old country boy language, we need to get up to the trough pretty quick ... right?"
Miller replied, "Yes."
Trustee Andrea Lea, who is the state auditor, asked why Miller recommended hiring two securities monitoring firms.
"All of the firms that we got proposals from were compared in terms of their recommendations about venue and choice of law, and looking at the material that we had, and what the theory of recovery would be, and so forth and so on," Miller said. "But we believe that, given the size and the scope of our losses, we felt that the two firms would work well together. I know that they have worked together in the past and we believe that the approach of one would be complementary of the other. I have no doubt that it is not essential that we have both. It is just that we believe that the pair of them will be insurance at making sure that all the bases are covered and various points of view are considered."
John Wallace, a spokesman for Allianz Global Investors, said Wednesday, "While we would not comment on the internal deliberations of any pension trustees' board, it is a matter of record that our Structured Alpha funds suffered in the face of unprecedented market turmoil during March.
"Unfortunately, despite having come through previous market shocks in 2011, 2015 and 2018, and having modeled more extreme scenarios, the speed, scale and volatility of the March market drawdown, together with the significant liquidity squeeze, went well beyond prior market dislocations and impeded the strategy's ability to prevent losses," Wallace said in a written statement.
Allianz officials have sought to explain these reasons for the drawdown to clients and their consultants and maintain open lines of communication, he said.
"The investment process and risk management function -- both of which operated as designed and [were] disclosed to investors throughout the downturn -- have been the subject of rigorous and regular due diligence efforts both prior to and during clients' respective investments in the funds," Wallace said. "AllianzGI has gladly participated in these efforts to ensure that investors' consultants could make fully-informed recommendations to their clients about the strategy and its risk and reward profile."
The Arkansas Teacher Retirement System's investments were valued at $17.5 billion at the end of fiscal 2019 a year ago.
Rhoden said Wednesday the current estimate is about $16.5 billion.
The system's final report on its investment performance for each fiscal year is usually not available until September or later. The system's target rate of investment return is 7.5% a year.
As of June 30, 2019, the system was 80% funded based on a $17.4 billion actuarial value of assets and $21.7 billion in liabilities with a projected payoff period of about 28 years, system actuary Gabriel, Roeder, Smith & Co. reported in December. The unfunded liabilities totaled $4.29 billion as of June 30, 2019, Gabriel estimated.