Alpine Capital liquidates 2 funds after 3rd fails

March 08, 1992|By Diana B. Henriques | Diana B. Henriques,New York Times News Service

NEW YORK -- Some ideas are simply catnip to the public. The Catholic Income Trust was just such a gimmick.

This whimsical mutual fund was set up in 1989 by Alpine Capital Management in Denver, which already managed two other mutual funds. The new fund invested in the obscure and rarely traded bonds issued by Catholic institutions like colleges and hospitals. What could be more adorable?

But the predictable spate of stories didn't attract enough investors to keep body and soul together at Catholic Income. Its assets never totaled much more than $4.3 million, and fees ate up about 5.75 percent of each dollar investors chipped in.

Last April, the Catholic Income Trust was quietly buried by Alpine and the estate was divided among its shareholders -- at $9 a share, a dollar less than its initial net asset value, according to Morningstar, a mutual fund service in Chicago.

Now, Alpine's two other mutual funds, the California Municipal Asset Trust and the National Municipal Asset Trust, are in the process of being liquidated.

But this time, the Securities and Exchange Commission is presiding at the funeral -- after lodging a civil complaint against Alpine and the funds, which invested almost exclusively in municipal leases.

A taste for obscure and rarely traded assets, it turns out, is not always just a cute gimmick; sometimes, it is a fatal flaw.

As is customary in SEC civil cases, Alpine Capital Management (which is not related to the finance group run by Oded Aboodi, the Time Warner adviser) did not admit any wrongdoing. But it agreed to the filing in December of a court order permanently barring the firm from violating securities laws in the future.

Edwin J. Pittock, Alpine's chief executive, and John I. Dickerson, its chief investment officer, were out of the office last week and staff members said they could not be reached.

Questions about the fate of the firm's mutual funds were referred Tom Waymire, who said he was a consultant hired by Alpine to handle the fund liquidations.

Mr. Waymire described the funds' experience with the SEC as "quite cordial." The regulators' complaint, he said, was merely a technical device that permitted the SEC to seek a court-appointed receiver.

He said that Alpine had decided to liquidate the two muni funds "as a purely economic decision" but found that their assets were taking longer than expected to sell.

No wonder. Municipal lease obligations arise when property or BTC equipment is leased to a governmental unit; the future lease payments are supposed to produce the income stream for the investors.

These instruments have become something of a fad among mutual funds because, like junk bonds in years past, they carry above-average interest rates and thus help boost a fund's advertised yield. That, in turn, can attract new investors.

But muni leases carry a higher coupon for a reason: They're riskier, because there is no ready market for them. "I wouldn't say they were 'illiquid,' because I think of that as something that cannot be sold," Mr. Waymire said. "But it just takes a while for somebody to buy them."

Well, it takes longer than a week, anyway. Especially if the leases are in default, as about 10 percent of these were. Thus, the funds were unable to honor their statutory obligation to redeem investors' shares within seven days, he explained.

"It wasn't that the funds did anything wrong," Mr. Waymire said. "The problem is that the SEC does not have a way that they could have just allowed us to suspend redemptions while we continued with our asset sales. They don't have any middle ground, other than to enforce the seven-day rule. So they had to come up with something to permit them to appoint a receiver," he continued. "These were technical things. We're not mad at anybody," he added. 'And we don't think the SEC is mad at anybody."

The SEC officials in Denver, who handled the case, will say no more than they said on Nov. 20, when they went to their local United States district court to ask that the funds' assets be frozen and a receiver be appointed to oversee the liquidation. But what the regulators said then seems to go a bit beyond "technical" violations.

They complained, for example, that Alpine and the funds were violating some basic provisions of the Investment Company Act of 1940, including the seven-day rule. The board of trustees overseeing the funds did not have the required number of independent members, the SEC charged, and net asset values were not accurately calculated.

The regulators further complained that the funds had taken out improper loans, had sold fund assets to an affiliate, and had kept inadequate financial and shareholder records.

A receiver has been appointed to try to sell the municipal leases, but no one can predict how long that process will take or how much money it will raise. Court documents showed that, as of Nov. 14, National Municipal Asset Trust had just $1.9 million in assets, down from $6.8 million on July 31.

Until this fire sale is completed, of course, shareholders cannot redeem their shares or estimate how much they will eventually get. But their predicament illustrates a paradox that worries a number of mutual fund regulators: People would never dream of sinking all their money into an exotic or risky investment; but they will not hesitate to put their money into a mutual fund that sinks all of its money into those same exotic instruments.

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