Oral Agreements with Asset Managers May Be Binding, Court Rules

A former manager for the California Public Employees’ Retirement System (CalPERS) has won its appeal of a breach of contract claim, arguing that the fund promised but didn’t honor a $100 million mandate.

Overturning a prior dismissal, an appeals judge concluded that US equities shop Centinela Capital Partners had sufficient evidence to suggest it entered into an enforceable oral agreement with CalPERS.

“Be careful what you say when discussing investment opportunities with managers.”

The decision has legal ramifications for asset owners beyond just CalPERS, according to two attorneys specializing in pension litigation.

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The case “provides an important warning to plan fiduciaries and their investment staff,” wrote Harvey Leiderman and Maytak Chin of law firm Reed Smith in a note to clients. “Be careful what you say when discussing investment opportunities with managers, especially those incumbents with whom you already have a contractual relationship. Make it clear in your communications—whether by phone, in person, by email or letter—that nothing will be binding on your plan unless and until a complete set of documents has been approved and inked by both sides.”

Between 2006 and 2008, CalPERS officially (and in writing) awarded minority-owned Centinela two mandates totaling $1 billion as part of the pension fund’s emerging manager program.

Centinela’s complaint claimed it reached a verbal agreement with senior CalPERS staff in May 2011 for a $100 million allocation into its next fund, but with a condition. Late former CIO Joe Dear, among other top fund officials, allegedly insisted that the firm cut ties with its Principal Cesar Baez, who had links to placement agents implicated in CalPERS’ massive pay-to-play scandal.

“CalPERS’ personnel, including defendant Dear, proposed and offered… that if Centinela arranged for Mr. Baez’s departure, CalPERS would at a minimum award Centinela the Link III contract for an additional $100 million,” the asset manager’s updated 2013 complaint stated. The firm then split with Baez.

Two months after the alleged agreement, CalPERS reportedly told Centinela it would not invest in the new fund. Centinela filed a breach of contract suit in late 2013, demanding a jury trial and $35 million in damages.

CalPERS did not respond to a request for comment by press time.

Global auditor and consulting firm PwC has formed a relationship with UK investment consultant Redington to create an “independent advisory proposition” for pension funds and their sponsors.

Citing “concerns over conflicts of interest in the investment consultancy process,” the firms announced their strategic alliance to be offered to UK pensions.

“We believe an integrated solution, leveraging the breadth, depth, and skills of both firms, is the best way to tackle the needs of our clients,” said Robert Gardner, co-CEO at Redington.

Clients taking up the services of this alliance would be able to access “independent advice” from strategy to execution, the firms said.

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Redington, with a background in investment consulting, is to bring its experience in driving returns from fund assets, improve funding levels and reduce downside risk, according to the companies. PwC is to use its knowledge of reducing and financing deficits, modernising pension plan design and member options, and creating asset/liability strategies.

“By applying the firms’ knowledge, people, and analytics in an integrated way, this alliance will help sponsors and trustees better understand and implement the necessary changes that will solve the challenges they face,” said Raj Moody, head of UK pensions consulting at PwC.

“Importantly, clients can be confident about the independence of advice particularly around asset strategy.”