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Friday, May 12, 2017

Federated's Fight With an Ex-Employee Cascades

News summary by MFWire's editors

A contract fight, between Donahue's Federated Investors [profile] and an entrepreneur who sold his shop to Federated almost a decade ago, is being dragged into the limelight thanks to a charitable investing titan publicly rebuking Federated chief Chris Donahue.

Chris Donahue
Federated Investors
President, CEO & Chairman
Yesterday Michael Larson, investment manager at BMGI, publicly revealed a letter he sent to Donahue last week about subpoenaing the giant Bill & Melinda Gates Foundation Trust (endowment: $40+ billion) in the lawsuit Federated Investors v. Michael E. Jones. The foundation is a former Federated client, and BMGI manages the assets of both the foundation and of Cascade Investment (which manages the Gates' wealth).

Chris Dieterich of the Wall Street Journal picked up on Larson's letter, calling it "an usually blunt rebuke" from a man with a "history of keeping a low profile." Spokespeople for both Larson and Federated declined to comment to the WSJ.

The Federated lawsuit, filed in New York City in the Supreme Court of the State of New York in July 2016, stems from Michael Jones' March 2014 departure from Federated. Jones previously led Rochester, New York-based Clover Capital as CEO and chief investment officer. Pittsburgh-based, publicly traded Federated bought Clover in December 2008, and Jones and his team joined Federated as part of the deal.

Federated claims that by 2013 Jones "was dissatisfied with Federated's management of the Clover business" so he "became a turncoat at Federated." The mutual fund firm accuses Jones of referring clients to North Star Partners, a Connecticut-based hedge fund, all while still working at Federated. North Star is a Westport, Connecticut-based hedge fund firm run by Michael Jones' brother, Andrew Jones.

"[Michael Jones] valued his enormous salary from Federated more than any sense of loyalty or ethics as a Federated employee," the October 2016 complaint reads. "He stayed at Federated and continued to collect his salary, while at the same time directing Federated's clients to his brother's investment fund, all in flagrant violation of New York law, his employment agreement and Federated's Code of Business Conduct and Ethics."

Michael Jones denies Federated's allegations.

The Bill & Melinda Gates Foundation Trust invested $15 million with Clover Capital back in 2005, and stayed on after the 2008 deal as a Federated Clover investor before exiting in 2014. As part of the ongoing legal battle, last week Federated's attorneys served the Gates entities with a subpoena for documents and testimony.

Larson says that the foundation dropped the Federated Clover Value Fund in 2014 over performance issues. He insists that, since then, the Gates entities "have not had business dealings with Federated, Mr. Jones or any of the other persons named in [the] lawsuit" (such as Andrew Jones of North Star).

And herein lies Larson's beef. Complying with the subpoena, he writes, "would also waste valuable time and resources". He calls the subpoena an "irresponsible step" that "reflects a fundamental lack-of-respect for all who have entrusted Federated with their assets."

Larson demands that Donahue have the lawyers withdraw the subpoena and adds BMGI "will not consider Federated for any future business." 

Edited by: Neil Anderson, Managing Editor

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