Money Managers' Ethics Questioned

From their offices on the 26th floor of the Federal Reserve Building in downtown Boston, Scott Sperling and Mike Eisenson sit atop the financial nerve center of New England.

Beyong the wide expanse of pane glass windows, beyond the cluster of skyscrapers that house the headquarters of some of the area's biggest banks, beyond the gold dome of the State House glittering in the late afternoon sun, the Charles River meanders by in the distance.

Way off on the horizon--not so far away, really, but far enough that you can't see them from these lofty heights--on the other side of the river's banks, stand the historic, ivied walls of Harvard Yard.

Harvard and the Federal Reserve Building are two very different places. But they are linked by Jack R. Meyer, recently appointed president of the Harvard Management Corporation (HMC) and manager of the University's $5 billion plus endowment.

And Sperling and Eisenson--a pair of thirtysomething yuppies with MBA's--work for Meyer as managing partners of the Aeneas Group incorporated, charged with running HMC's private placement portfolio.

That portfolio--which includes some of HMC's riskiest holdings--is spread among investments in real estate, energy commodities and venture capital. And it is a portfolio that, within the last decade, has grown from aninitial value of $140 million when Sperling andEisenson first took charge, to more than #1.2billion.

According to its stewards, Aeneas is now one ofthe largest private investment companies in thecountry. Its rapid development and burgeoningpocketbook have earned the almost universaladmiration of industry experts. Having watched itperform, other universities, once reluctant tomake high risk investments with their endowments,have abandoned their fears and followed HMC'slead.

But Aeneas has its critics as well. Sperlingand Eisenson in particular have been the focus ofincreased scrutiny since earning 1989 performancebonuses in the high sex figures that placed theirsalaries to over $1 million dollars each--thehighest of any Harvard official, and more than sixtimes what then-President Derek C. Bok earned inthe same year.

Less than two years later, HMC wrote downapproximately $200 million in Aeneas investments,a devaluation that amounted to more than one sixthof the portfolio's total worth.

The youthful duo's management style has alsobeen plagued by charges that it is too hands-off,at times even getting out of control. Personalityconflicts have reportedly led to the departure ofmore than one top Aeneas executive. Andallegations of ethical improprieties havedetracted from Aeneas' otherwise polished image.

Many, if not most of the charges have beenlevelled at the ruggedly handsome, slightlygraying Sperling--the younger of the two--anexecutive who would look more comfortable in a J.Crew catalog than a pin-stripe suit. Sources closeto HMC have asserted that the darker, more asceticEisenson is better regarded in the industry.

In an interview with The Crimson last week,Sperling and Eisenson readily acknowledged thatinvestment mistakes have been made at Aeneas. Butthey said such errors are to be expected withinthe context of the type of high-risk investmentsAeneas makes. And they denied that there have beenany serious problems ethical or otherwise, withinthe upper ranks of either Aeneas or HMC.

Sources familiar with HMC told a differentstory, however. Most frequently cited in theircomments was HMC's salary structure, which theyclaimed contributed to vast over-compensation forSperling and Eisenson in 1989.

HMC officials have confirmed that since Meyerbecame president of the corporation about one anda half years ago, its salary structure has beenchanged. According to sources close to thecompany, the previous structure allowed Sperlingand Esenson to collect large bonuses based onestimated profits that HMC had not actually earnedand on outdated investment valuations that weresignificantly inflated.

The old system of compensation might haveencouraged the two money managers to makeinvestments based solely on their short termperformance prospects, the sources alleged.Furthermore, according to the sources, it mighthave provided a considerable personal financialincentive for Sperling and Eisenson to ignore theovervaluation of their portfolio.

"Under the old compensation structure there wasmotivation for that sort of behavior," one sourcetold The Crimson. "The compensation incentive wasa short term one, an incentive to make investmentdecisions along those lines."

"They're investing in illiquid assets thatmature over many years and for anyone'scompensation to be heavily weighted toward thenear term in that sort of circumstance is absolutelunacy," the source said. "It's a license to stealin the hands of those inclined to do that."

The source alleged that Sperling and Eisensonreceived a total of 4 percent of Aeneas' profitson every investment overperformance in excess of10 percent.

Based on that system, the two managers werepermitted to keep their 1989 bonuses and were notpenalized for the 1991 devaluation's.

"They each got two percent on $50 million thatwas overperformance that year," the source said."The subsequent write-offs of $200 million wipedthat out four-fold."

"To pay significant bonuses based on short termpaper profits is preposterous," said anothersource. "The evaporation of those profitscertainly proves the point."

Sperling and Eisenson, while declining toelaborate on either the old or new systems ofcompensation, denied that they were ever overpaid,or that their investments were held at inflatedvalues.

They said they never knowingly allowed theworth of the Aeneas protfolio to be overvalued.Those estimates, they said, are made by outsideauditors. And the sharp devaluation, theymaintained, must be kept in the context of thecollapsing real estate and commodities market in1990.

"In a hundred companies there may have beensome that were overvalued but if they were theyovervalued by somebody else," Eisenson said.

Eisenson asserted that during the four-yearperiod for which the 1989 bonuses were paid,Aeneas earned $290 million in realized profits andsaw its investment valuations marked up by #100million.

"Reasonable people can differ on what isappropriate compensation for that performance," hesaid. "I would say that we're comfortable that ourbonuses for that period were not unreasonable inrelation to the profit we generated."

But sources said that the pair's compensationwas far in excess of what would have beenappropriate for their performance, especiallygiven Aeneas' large subsequent write-offs.

"Kids shouldn't be getting million dollarbonuses for screwing around with valuations," onesource said.

"That is outrageous. It's tantamount to legallarceny," charged another. "I'm intimatelyfamiliar with the compensation structure thatpeople normally get and to have that occur andsubsequently have a substantial write-off is justtotally unacceptable."

Shortly after the million dollar salaries weredisclosed in October 1991, Sperling told TheCrimson that his and his partner's steepcompensation was justified. He said that if theyhad performed as well for a Wall Street firm,their salaries would likely have been 20 timeshigher.

But sources said Sperling's comment was, at theleast, mistaken.

"People on Wall Street are still laughing aboutthat quote," said one source close to HMC. "Mr.Sperling would be unemployed on Wall Street.People lose their jobs over things like that."

Last week, Sperling refused to stand by hisprevious assertion.

"The statement was taken well out of context,and it was a partial quote," Sperling said. "All Ican say is, look what the standard compensation isas a percent of profit in the venture business andapply those formulas and you come up with anumber."

But earlier in the interview, Sperlingsuggested that the salaries were low.

"The bonuses are still substantially lower thanthe industry standard compensation for that muchprofit," he said.

One source told Teh Crimson that, in additionto earning undeserved compensation, the Aeneasduo--and Sperling especially--failed to maintainadequate control and oversight of Aeneas'investments, leading to internal feuding at thecompany that resulted in the departure of some toppartners. The source said that former HMCpresident Walter M. Cabot '54 allowed Sperling tomake major decisions on a regular basis withoutsupervision.

"On investments up to [approximately $5million] Scott had...de facto free reign to dowhat we wanted while Walter was there," the sourcesaid.

The source said that when Meyer took over fromCabot as HMC president, he put in place a newboard of directors for Aeneas to supervise its twomanaging partners more closely.

Sperling and Eisenson acknowledged that a newboard exist, asserting that the idea for itscreation was theirs and that Meyer merely agreedto it. They said the board was established not torespond to lax business practices or inadequatesupervision, but to allow for more consultationon Aeneas' investment decisions.

"I think the context of 'a board was imposed onus' is completely wrong," Sperling said. "thecontext that the board was agreed to because weneeded 'stricter supervision' is categoricallyuntrue."

Sperling added that the company has always beenwell-managed. "I don't think anyone's ever feltthat Aeneas was 'out of control.' I don't thinkthat's been an issue," he said.

Asked about Sperling and Eisenson, Meyer saidhe is "pleased" with their performance, and hesaid Aneas has outperformed its benchmark with anestimated nominal rate of return over the lastdecade of about 12.5 percent, slightly less thanHMC s a whole, but satisfactory given the "toughtimes" for private placements in the 1980s.Sperling and Eisenson estimated the returns asapproximately 1 to 2 percent higher.

But the sources said that the HMC president'stwo major actions with regard to Aeneas sincetaking over the company's helm--the revision ofthe salary structure and the creation of the boardof directors--demonstrate serious concern. Andeven before Meyer took charge, the sources said,there was growing attention paid at HMC to thepersonalities and industry-wide reputations ofAeneas' two managing partners.

"Sperling enjoys the limelight," said onesource close to HMC. "Eisenson seems content tostay in the background and collect his salary."

Another source said Sperling was once warned bya top HMC official to keep a low profile.

According to the source, "[The official] toldSperling that the next time he sees his name inthe paper, it better be in the obituary column."

Sperling denied that the reprimand everoccurred and the HMC official, who is no longerwith the University, could not be reached forcomment.

Sources also told The Crimson that Sperling wasinvolved in ethically questionable activity withregard to a film production and distributioncompany Aeneas controls. Sperling's sister waslisted in the credits of a film, Cold Feet,produced by the company, Avenue Pictures thesources said.

Although Sperling acknowledged that the chargeis true, he denied any wrongdoing.

"It's hard for me to see an ethical issuethere," Sperling said, adding that the did notarrange for his sister to work on ColdFeet.

Avenue President Cary Brokaw confirmed thatSperling did not get his sister the job on ColdFeet. "Scott being her brother was one ofseveral reasons why she was interviewed...but itwas her qualities as an individual that caused herto get the position," Brokaw said.

Still, despite the criticisms, Sperling andEisenson said they are convinced that they areeffective leaders of a superior corporation.

"Our objective in our role here is to build anorganization that will be a high quality privateinvestment organization that works for Harvard,"Eisenson said. "That's what we've been trying todo."

Said Sperling, "We make mistakes. We can'tpromise not to. But I think overall, we're prettyhappy with the organization. And I think mostpeople who are knowledgeable about what we do areas well."

And then, chuckling slightly he added, "Butobviously not everybody."CrimsonAeneas Managing Partner SCOTT M.SPERLING

According to its stewards, Aeneas is now one ofthe largest private investment companies in thecountry. Its rapid development and burgeoningpocketbook have earned the almost universaladmiration of industry experts. Having watched itperform, other universities, once reluctant tomake high risk investments with their endowments,have abandoned their fears and followed HMC'slead.

But Aeneas has its critics as well. Sperlingand Eisenson in particular have been the focus ofincreased scrutiny since earning 1989 performancebonuses in the high sex figures that placed theirsalaries to over $1 million dollars each--thehighest of any Harvard official, and more than sixtimes what then-President Derek C. Bok earned inthe same year.

Less than two years later, HMC wrote downapproximately $200 million in Aeneas investments,a devaluation that amounted to more than one sixthof the portfolio's total worth.

The youthful duo's management style has alsobeen plagued by charges that it is too hands-off,at times even getting out of control. Personalityconflicts have reportedly led to the departure ofmore than one top Aeneas executive. Andallegations of ethical improprieties havedetracted from Aeneas' otherwise polished image.

Many, if not most of the charges have beenlevelled at the ruggedly handsome, slightlygraying Sperling--the younger of the two--anexecutive who would look more comfortable in a J.Crew catalog than a pin-stripe suit. Sources closeto HMC have asserted that the darker, more asceticEisenson is better regarded in the industry.

In an interview with The Crimson last week,Sperling and Eisenson readily acknowledged thatinvestment mistakes have been made at Aeneas. Butthey said such errors are to be expected withinthe context of the type of high-risk investmentsAeneas makes. And they denied that there have beenany serious problems ethical or otherwise, withinthe upper ranks of either Aeneas or HMC.

Sources familiar with HMC told a differentstory, however. Most frequently cited in theircomments was HMC's salary structure, which theyclaimed contributed to vast over-compensation forSperling and Eisenson in 1989.

HMC officials have confirmed that since Meyerbecame president of the corporation about one anda half years ago, its salary structure has beenchanged. According to sources close to thecompany, the previous structure allowed Sperlingand Esenson to collect large bonuses based onestimated profits that HMC had not actually earnedand on outdated investment valuations that weresignificantly inflated.

The old system of compensation might haveencouraged the two money managers to makeinvestments based solely on their short termperformance prospects, the sources alleged.Furthermore, according to the sources, it mighthave provided a considerable personal financialincentive for Sperling and Eisenson to ignore theovervaluation of their portfolio.

"Under the old compensation structure there wasmotivation for that sort of behavior," one sourcetold The Crimson. "The compensation incentive wasa short term one, an incentive to make investmentdecisions along those lines."

"They're investing in illiquid assets thatmature over many years and for anyone'scompensation to be heavily weighted toward thenear term in that sort of circumstance is absolutelunacy," the source said. "It's a license to stealin the hands of those inclined to do that."

The source alleged that Sperling and Eisensonreceived a total of 4 percent of Aeneas' profitson every investment overperformance in excess of10 percent.

Based on that system, the two managers werepermitted to keep their 1989 bonuses and were notpenalized for the 1991 devaluation's.

"They each got two percent on $50 million thatwas overperformance that year," the source said."The subsequent write-offs of $200 million wipedthat out four-fold."

"To pay significant bonuses based on short termpaper profits is preposterous," said anothersource. "The evaporation of those profitscertainly proves the point."

Sperling and Eisenson, while declining toelaborate on either the old or new systems ofcompensation, denied that they were ever overpaid,or that their investments were held at inflatedvalues.

They said they never knowingly allowed theworth of the Aeneas protfolio to be overvalued.Those estimates, they said, are made by outsideauditors. And the sharp devaluation, theymaintained, must be kept in the context of thecollapsing real estate and commodities market in1990.

"In a hundred companies there may have beensome that were overvalued but if they were theyovervalued by somebody else," Eisenson said.

Eisenson asserted that during the four-yearperiod for which the 1989 bonuses were paid,Aeneas earned $290 million in realized profits andsaw its investment valuations marked up by #100million.

"Reasonable people can differ on what isappropriate compensation for that performance," hesaid. "I would say that we're comfortable that ourbonuses for that period were not unreasonable inrelation to the profit we generated."

But sources said that the pair's compensationwas far in excess of what would have beenappropriate for their performance, especiallygiven Aeneas' large subsequent write-offs.

"Kids shouldn't be getting million dollarbonuses for screwing around with valuations," onesource said.

"That is outrageous. It's tantamount to legallarceny," charged another. "I'm intimatelyfamiliar with the compensation structure thatpeople normally get and to have that occur andsubsequently have a substantial write-off is justtotally unacceptable."

Shortly after the million dollar salaries weredisclosed in October 1991, Sperling told TheCrimson that his and his partner's steepcompensation was justified. He said that if theyhad performed as well for a Wall Street firm,their salaries would likely have been 20 timeshigher.

But sources said Sperling's comment was, at theleast, mistaken.

"People on Wall Street are still laughing aboutthat quote," said one source close to HMC. "Mr.Sperling would be unemployed on Wall Street.People lose their jobs over things like that."

Last week, Sperling refused to stand by hisprevious assertion.

"The statement was taken well out of context,and it was a partial quote," Sperling said. "All Ican say is, look what the standard compensation isas a percent of profit in the venture business andapply those formulas and you come up with anumber."

But earlier in the interview, Sperlingsuggested that the salaries were low.

"The bonuses are still substantially lower thanthe industry standard compensation for that muchprofit," he said.

One source told Teh Crimson that, in additionto earning undeserved compensation, the Aeneasduo--and Sperling especially--failed to maintainadequate control and oversight of Aeneas'investments, leading to internal feuding at thecompany that resulted in the departure of some toppartners. The source said that former HMCpresident Walter M. Cabot '54 allowed Sperling tomake major decisions on a regular basis withoutsupervision.

"On investments up to [approximately $5million] Scott had...de facto free reign to dowhat we wanted while Walter was there," the sourcesaid.

The source said that when Meyer took over fromCabot as HMC president, he put in place a newboard of directors for Aeneas to supervise its twomanaging partners more closely.

Sperling and Eisenson acknowledged that a newboard exist, asserting that the idea for itscreation was theirs and that Meyer merely agreedto it. They said the board was established not torespond to lax business practices or inadequatesupervision, but to allow for more consultationon Aeneas' investment decisions.

"I think the context of 'a board was imposed onus' is completely wrong," Sperling said. "thecontext that the board was agreed to because weneeded 'stricter supervision' is categoricallyuntrue."

Sperling added that the company has always beenwell-managed. "I don't think anyone's ever feltthat Aeneas was 'out of control.' I don't thinkthat's been an issue," he said.

Asked about Sperling and Eisenson, Meyer saidhe is "pleased" with their performance, and hesaid Aneas has outperformed its benchmark with anestimated nominal rate of return over the lastdecade of about 12.5 percent, slightly less thanHMC s a whole, but satisfactory given the "toughtimes" for private placements in the 1980s.Sperling and Eisenson estimated the returns asapproximately 1 to 2 percent higher.

But the sources said that the HMC president'stwo major actions with regard to Aeneas sincetaking over the company's helm--the revision ofthe salary structure and the creation of the boardof directors--demonstrate serious concern. Andeven before Meyer took charge, the sources said,there was growing attention paid at HMC to thepersonalities and industry-wide reputations ofAeneas' two managing partners.

"Sperling enjoys the limelight," said onesource close to HMC. "Eisenson seems content tostay in the background and collect his salary."

Another source said Sperling was once warned bya top HMC official to keep a low profile.

According to the source, "[The official] toldSperling that the next time he sees his name inthe paper, it better be in the obituary column."

Sperling denied that the reprimand everoccurred and the HMC official, who is no longerwith the University, could not be reached forcomment.

Sources also told The Crimson that Sperling wasinvolved in ethically questionable activity withregard to a film production and distributioncompany Aeneas controls. Sperling's sister waslisted in the credits of a film, Cold Feet,produced by the company, Avenue Pictures thesources said.

Although Sperling acknowledged that the chargeis true, he denied any wrongdoing.

"It's hard for me to see an ethical issuethere," Sperling said, adding that the did notarrange for his sister to work on ColdFeet.

Avenue President Cary Brokaw confirmed thatSperling did not get his sister the job on ColdFeet. "Scott being her brother was one ofseveral reasons why she was interviewed...but itwas her qualities as an individual that caused herto get the position," Brokaw said.

Still, despite the criticisms, Sperling andEisenson said they are convinced that they areeffective leaders of a superior corporation.

"Our objective in our role here is to build anorganization that will be a high quality privateinvestment organization that works for Harvard,"Eisenson said. "That's what we've been trying todo."

Said Sperling, "We make mistakes. We can'tpromise not to. But I think overall, we're prettyhappy with the organization. And I think mostpeople who are knowledgeable about what we do areas well."

And then, chuckling slightly he added, "Butobviously not everybody."CrimsonAeneas Managing Partner SCOTT M.SPERLING