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U.S. Securities and Exchange Commission


Release No. 57446 / March 6, 2008

Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The Retirement Systems of Alabama

I. Introduction

The Division of Enforcement has investigated whether The Retirement Systems of Alabama ("RSA") violated the federal securities laws by purchasing shares of The Liberty Corporation ("Liberty") on the basis of material, nonpublic information concerning a prospective acquisition of Liberty by Raycom Media, Inc. ("Raycom"). During discussion and negotiation of the deal, RSA received material, nonpublic information regarding Liberty and the proposed transaction. RSA then purchased 73,700 Liberty shares during the two weeks prior to the public announcement of the transaction in August 2005. After the public announcement, the price of Liberty stock rose significantly, increasing the value of RSA's Liberty shares by more than $700,000.

RSA is the retirement system for Alabama state and local employees. RSA does not engage outside professional money managers, but instead relies on an in-house investment staff to manage more than $30 billion in assets. At the time of the events described in this report, RSA had no policies, procedures, training or compliance officer to ensure its compliance with the federal securities laws.

RSA cooperated in the SEC staff's investigation. In addition, after the investigation began, RSA determined the identity of those who sold the Liberty shares that RSA purchased and offered those sellers compensation equivalent to rescission. RSA also engaged securities counsel and has implemented a compliance program that its counsel designed and recommended.

Based upon information obtained during the investigation, the Commission deems it appropriate that it issue this Report of Investigation ("Report") pursuant to Section 21(a) of the Securities Exchange Act of 1934 ("Exchange Act")1 to emphasize the responsibilities of all investment professionals, including large public retirement systems and other public entities, under the federal securities laws and to highlight the risks they undertake when they operate without a compliance program.

II. Facts

A. Background

RSA is a state agency that administers 20 retirement funds with aggregate assets in excess of $30 billion as of September 30, 2006. Two funds, the Teachers' Retirement System and the Employees' Retirement System ("The Retirement Systems"), account for more than 90% of those assets. The Retirement Systems are defined benefit pension plans for Alabama state and local employees. Although many public pension funds employ outside investment advisers to manage at least some of their assets, RSA's 13 person in-house investment staff, along with RSA's Chief Executive Officer ("CEO"), manage all of RSA's investments. RSA's CEO has held his position since 1973, when RSA's assets were a small fraction of its current assets. The Retirement Systems have Boards of Control that are the statutory trustees of the funds. The Boards of Control, or an Investment Committee consisting of board members, must approve RSA's investment decisions. In practice, however, that authority largely has been delegated to RSA's CEO. Thus, there has been little oversight of the investment activities of RSA's CEO and staff.

At the time of the events described in this Report, RSA had no program, policy, practice or training to ensure that its investment staff understood and complied with the federal securities laws in general or insider trading laws in particular. RSA also did not have a compliance officer, and the responsibilities of its general counsel did not include oversight of RSA's investment activities.

RSA founded Raycom, a privately-held company, in 1996 and has been its primary financing source. In the Summer of 2005, Raycom's outstanding debt to RSA was approximately $2 billion, and RSA held warrants for 80% of Raycom's common stock. Raycom owned and operated television stations, as did Liberty. Raycom had previously considered a possible business combination with Liberty, but there had been no serious discussions between them.

B. Raycom-Liberty Discussions

In June 2005, a business adviser firm that had worked with Raycom and RSA in the past approached RSA about financing a Raycom acquisition of Liberty. The adviser firm was operated by two individuals (the "Advisers" or, individually, the "Adviser"), one of whom was a lawyer.2 On June 14, they met at RSA's offices with RSA's CEO, members of RSA's investment staff, and Raycom's CEO. At that meeting, the Advisers presented their analysis that Liberty's controlling shareholders were ready to sell the company, and RSA and Raycom gave the Advisers authority to approach Liberty on their behalf.

When the Advisers contacted Liberty to begin discussions, Liberty's CEO first required assurance that RSA would finance the prospective transaction. RSA's CEO provided that assurance during a telephone conversation with Liberty's CEO on June 24. During that conversation, Liberty's CEO said that $1 billion was his "number." In response, RSA's CEO indicated his willingness to finance a transaction at that price.

On June 27, 2005, the Advisers and their firm entered into a written non-disclosure agreement with Liberty (the "NDA"). Under the NDA, the Advisers agreed that, prior to disclosing any of Liberty's confidential information, they would require the person(s) to whom they intended to make the disclosure to be bound by the terms of the NDA. The NDA also prohibited them from disclosing the fact of the discussions, with exceptions not applicable here. Finally, the NDA specifically set forth an acknowledgment that the Advisers were aware that the securities laws prohibit (1) trading in reliance on material, nonpublic information concerning Liberty, or a possible transaction involving Liberty, or (2) communicating such information to anyone else where reasonably foreseeable that the other person was likely to trade in reliance upon such information. On July 1, the Advisers met with Liberty officials and obtained confidential Liberty information. They also began using a code name to refer to the prospective transaction.

On July 12, 2005, the Advisers made another presentation to RSA and Raycom's CEO.3 The Advisers distributed a hard copy presentation, with indicia that they were communicating confidential information: the code name was used as the title of the presentation booklet; the code name and "Target" were used throughout the booklet for all references to Liberty; the booklet was marked "CONFIDENTIAL"; the booklet stated that the Advisers had executed a confidentiality agreement with Liberty and that they had met "all day" with Liberty officials; and the booklet included Liberty's confidential (positive) projections and confidential financial information about many of Liberty's individual television stations. RSA neither asked to see the NDA nor inquired about its terms.4 RSA's CEO did not believe that RSA had a duty of confidentiality because RSA had not signed a non-disclosure agreement. The RSA investment staff who attended the meeting understood that they were supposed to keep the information confidential.5

During the July 12 meeting, the RSA investment staff asked questions that suggested they had a negative view of the proposed Raycom-Liberty transaction. More than halfway through that meeting, when one of the Advisers (the attorney) believed RSA was losing interest in the transaction, he told RSA that no matter what it decided to do, Liberty was for sale and RSA should buy some Liberty stock and that RSA should limit its purchases to five percent of outstanding Liberty shares.6 The Adviser viewed his statement as a casual investment suggestion. The Adviser was not, and never had been, in an attorney-client relationship with RSA, although he had advised companies to which RSA was a lender. RSA did not have any basis to believe that the Adviser, even though he was an attorney, had any federal securities law experience or expertise. The Adviser did not, in fact, have such experience or expertise.

At the conclusion of the July 12 meeting, RSA and Raycom authorized the Advisers to inform Liberty that Raycom was prepared to proceed with a business combination based on a preliminary value for Liberty of $1 billion, subject to due diligence and negotiation of documentation. It was clear from the Advisers' presentation materials that $1 billion represented a substantial premium over the market price of Liberty's stock. On July 19, Raycom entered into a confidentiality agreement with Liberty, and the Advisers led extensive due diligence at Liberty's offices on July 21 and 22.7

On August 8, RSA's CEO received from Raycom a notice of a special meeting of Raycom's board of directors, to be held on August 15, to consider the Liberty acquisition. That notice contained a specific admonition regarding confidentiality, the federal securities laws and insider trading.8 RSA's CEO circulated the notice to three members of RSA's investment staff, including the Chief Investment Officer, so that they would see the confidentiality and securities law warnings and not engage in any personal trading of Liberty stock or mention the proposed transaction to others. Raycom's board reacted positively to the August 15 presentation regarding the Liberty transaction, and the Advisers reported that result to RSA's CEO the following day.9

C. RSA's Purchases of Liberty Stock

After receiving and reviewing the August 8 notice of the upcoming special meeting of the Raycom board of directors, four weeks after the Adviser's suggestion to purchase Liberty stock, RSA's CEO instructed RSA's Chief Investment Officer to make those purchases. RSA's CEO testified that it was probably the August 8 notice that prompted him to instruct the Chief Investment Officer to purchase Liberty stock. From August 10 to August 25, RSA purchased a total of 73,700 Liberty shares.10 RSA ceased purchasing Liberty shares on August 25, after it learned that a public announcement of the transaction would likely be released later that day.

The average price of RSA's purchases of Liberty stock was $37.14 per share. After the market closed on August 25, the parties announced that Raycom had agreed to pay $47.35 per share to acquire Liberty. The following day, the price of Liberty stock rose approximately $10 per share and closed at $47.51, resulting in an increase in the value of RSA's shares of more than $700,000.11

RSA's purchases of Liberty stock were unusual in at least two respects. First, RSA's CEO directed the trades even though he normally was not involved in equity trading decisions. Second, Liberty's market capitalization at the time was less than $1 billion and did not satisfy the $5 billion market capitalization guidelines RSA generally used for the two funds that purchased the shares.

During the SEC staff's investigation, RSA determined the identity of those who sold the Liberty shares that RSA purchased and offered those sellers compensation equivalent to rescission.12 To date, sellers representing more than 90% of the shares RSA purchased have accepted RSA's offer. Because they included interest, RSA's payments to the sellers exceed RSA's profits from its purchases of Liberty stock.

III. Discussion

State pension funds such as RSA are exempt from the requirements of the Investment Company Act of 1940 and the Investment Advisers Act, two federal statutes that regulate money managers.13 However, public pension funds and their employees are subject to the anti-fraud provisions of the federal securities laws and Commission rules thereunder. Section 10(b) of the Exchange Act and Rule 10b 5 prohibit the purchase or sale of securities on the basis of material, nonpublic information in breach of a duty of trust or confidence. That prohibition covers "insiders," those who acquire the information in the context of a relationship of trust or confidence, and persons who are "tippees" of either "insiders" or persons who have misappropriated the information. In addition, controlling persons who fail to prevent insider trading may be subject to civil penalties under Section 21A of the Exchange Act.

In issuing this Report, we observe that RSA's trading could have been prevented if RSA had adequate policies and procedures to assure compliance with the federal securities laws. Most of the RSA investment personnel involved in this matter, including its CEO, did not have a clear understanding of the securities law duties and risks implicated when they came into possession of material, nonpublic information. RSA had an in-house general counsel, but he was not responsible for securities law compliance and was not consulted before the trades. RSA had outside counsel with considerable securities law expertise, but there was no practice or procedure for the investment staff to seek advice regarding such issues. If there had been a reasonable compliance program in place at RSA at the time of the events described in this Report, RSA likely would not have purchased Liberty stock prior to the public announcement of the transaction.

We also take into consideration the following:

  • RSA has taken remedial action-including compensation of the sellers of the Liberty stock RSA purchased-that would be sought or required in an enforcement proceeding. We believe it would be appropriate here not to seek or to impose a penalty because it would be paid from Alabama public employee contributions to the funds managed by RSA, and the earnings on those contributions. Similarly, in view of RSA's adoption of a compliance program, it is appropriate under these circumstances that the Commission not impose a cease-and-desist order or seek a permanent injunction prohibiting future violations of the anti-fraud provisions of the Exchange Act.
  • RSA cooperated in the staff's investigation.
  • RSA's CEO cooperated in the staff's investigation, acknowledged error in directing RSA's purchases of Liberty stock, and authorized all remedial action described in this Report.
  • No individual profited from the conduct described in this Report.

IV. Conclusion

We issue this Report to remind investment managers, public and private, of their obligation to comply with the federal securities laws and the risks they undertake by operating without an adequate compliance program. RSA's conduct could have been prevented with appropriate policies, procedures and training.

By the Commission (Chairman Cox, Commissioner Atkins, Commissioner Casey).


For purposes of maintaining the utmost confidentiality, we code-named this company [Liberty] "5 Henry Street". To be able to view internal, non-public information about 5 Henry Street, Raycom had to execute a Confidentiality Agreement. The Confidentiality Agreement prohibits Raycom and its employees, officers, agents and its directors from disclosing any confidential information received from 5 Henry Street and from disclosing that Raycom and 5 Henry Street have even entered into discussions of a possible transaction. In addition, federal securities laws prohibit any person with knowledge of the proposed transaction from trading in the securities of 5 Henry Street or informing any other person of the proposed transaction who then buys or sells securities of 5 Henry Street before that information is made publicly available. (italics in original)



Modified: 03/06/2008