11/07/2012

Arrowstreet Disclosure Prompts Resignation

A Harvard economist who sat on the board of $35 billion Arrowstreet Capital abruptly quit the post when a regulatory filing by the firm referenced a prominent civil-fraud case he had previously settled.

Andrei Shleifer resigned in August, but the Boston fund operator fully disclosed the matter only last month. Shleifer, who had joined Arrowstreet’s board in April, played a key role in the 1990s working with the U.S. Agency for International Development to modernize Russia’s economy. But in 2005, he agreed to pay a $2 million fine to settle allegations that he misused his position as a government contractor to benefit himself and others.

Arrowstreet would have been well aware of this history, given the firm’s close ties to Harvard, which also agreed to settle related civil-fraud charges in its role as a contractor for USAID. John Campbell, co-head of research and one of three principals of the firm, served on the board of Harvard Management from 2004 to 2011 and is a colleague of Shleifer in Harvard’s economics department.

But it wasn’t until early August that Arrowstreet decided to disclose Shleifer’s past legal entanglements via its Form ADV. He resigned his board seat on Aug. 6. The firm subsequently laid out the events in an amendment to its ADV Part 2, or brochure. The brochure says Shleifer’s settlement was “recently identified by us as appropriate for disclosure.”

“Something clearly happened for them to rethink this,” said Dechert lawyer George Mazin, who isn’t involved in the matter.

Form ADV requires investment advisors to report, up to 10 years after the fact, whether a federal regulatory agency has found any executive or board member to have been dishonest, unfair or unethical, to have made a false statement, or to have been in violation of investment-related regulations.

In the settlement, Harvard, Shleifer and others agreed to pay a total of $31 million to resolve allegations that they violated the False Claims Act or other laws. As part of the government’s case, a firm now known as Bracebridge Capital agreed to pay a $1.5 million fine in 2004. The firm is co-owned by Shleifer’s wife, Nancy Zimmerman.

Most of Arrowstreet’s assets are managed via long-only vehicles, but the firm also runs two 130/30 funds: Arrowstreet EAFE Alpha Extension Fund 2, which invests in equities outside of North America, and Arrowstreet Global Alpha Extension Fund 1, which invests in equities globally. Those types of funds increase their long exposure to 130% while consistently taking short positions equal to 30% of their equity capital.

Back Print