The Board of Regents has authorized University attorneys to proceed with an arbitration claim against Piper Jaffray Cos. to recover about $13 million the University lost in investments in 1994.
The claim — filed with the National Association of Securities Dealers — was made “because we have a valid claim and need to be compensated for the losses we incurred,” said Mark Rotenberg, head attorney for the University.
The University did not file a lawsuit against Piper because of a contract between the two parties that provided for an arbitrator to resolve disputes instead of going to court.
The University lost the money in mortgage-backed derivatives, a financial investment that derives its value from a company’s underlying assets. Derivatives are a form of aggressive investment that can lead to greater revenues — or greater losses — than a more conservative investment strategy.
Richard Lamm, a trader with the brokerage firm R J Steichen & Company, said that with derivatives, in most cases investors are betting on interest rates. The securities behind the derivatives at the University were strong, but it was a timing issue, he said. The risk in derivatives depends on whether the interest rates go up or down. When interest rates rose, the value of the derivatives fell.
If University investors would have held on to the derivatives, Lamm said, they eventually would have paid off, but customers were not aware that it would take so long for the investment to pay off.
Returns on University investments historically have been better than national averages. For the 10 years before the $13 million loss, the University reaped a 14.5 percent annualized return on investments with a number of different brokerage firms, while other universities and foundations were making an average of 12.9 percent. This earned the school $30 million it would not have had if its investments had brought an average return, according to University documents.
When the regents learned of the loss in 1994, Piper was managing nearly $40 million for the University. Following the University’s loss, Roger Paschke, associate vice president for Finance, wrote in a letter to the board that “we expect to be proposing a future limitation of perhaps no more than $5 million in any such security.”
Paschke, who is responsible for the management of University funds, would not return phone calls.
According to a weekly bulletin released by University Relations, each year the University manages $2.5 billion in assets, of which less than 7 percent is in alternative investments such as derivative accounts.
Nick Berberian, a Chicago-based attorney whose firm was hired by the University to work on the claim, said although it is theoretically true that derivatives eventually pay off, “it would have taken a long time before the losses were recouped.”
It would have taken 20 to 30 years to recover the losses, Berberian said.
Piper was providing the University with long-term information, Berberian said. At no time did the school’s investors know the risks. The University has not done business with Piper since the incident, he said.
Rotenberg said the way Piper handled the University’s investment was “misleading and deceptive.” Piper directed the investment that put the University into derivatives, he said.
“The public has a right to get the funds back,” Rotenberg said. A decision on the University’s arbitration claim is expected late this year.
Piper has faced similar charges in the past from other investors. Last month Piper agreed to pay $15.8 million during the next five years to settle a lawsuit alleging the company failed to adequately advise investors of the risks involved with some types of investments.
The payout comes about a year after a nearly $70 million settlement between Piper and investors regarding similar allegations.
Earlier this year, Piper was fined $1.9 million by NASD and the Minnesota Department of Commerce for improperly marketing and selling a mutual fund.
By October 1994, Piper announced they had already suffered losses of $950 million on derivatives.
Rotenberg said he is hopeful the claim will be viewed as very strong and the University will see its public funds returned. He called arbitration a “cheaper and more efficient way of settling disputes,” adding that it is the most common way of resolving these types of issues.
Marie Uhlichy, director of corporate communications for Piper, said she cannot comment on individual cases, but the company has been “very pleased with the loyalty” of the clients who continue to do business with Piper.
“The market is something we cannot control,” Uhlich said, adding that Piper has been through a lot in its 100-year history and posted record revenues this quarter.