First, renegade money managers flew out the exits at Mellon Bank Corp.'s Boston Co. subsidiary. Now, the money is heading for the doors.

In one week in late April, 19 top managers quit Boston Co.'s high-powered Asset Management Inc. unit, following Mellon's refusal to consider their management buyout offer. In the aftermath, investors are pulling some $3 billion of the $26 billion under management at the unit. Arizona's State Retirement System already has withdrawn $1 billion; the California Public Employees' Retirement System (CalPERS), the nation's largest pension fund, says it will take out $800 million. "The firm has been gutted" by the defections, says a CalPERS spokesman.

"DE MINIMUS." Mellon Vice-Chairman Christopher Condron says the impact of the departures has been "de minimus," declining to comment on specific asset withdrawals. "Our investment process continues to function well," he says.

But the episode already has become an expensive embarrassment for the Pittsburgh bank, which paid $1.45 billion for Boston Co. in 1993. Mellon managers have been traveling across the U.S. to soothe worried customers, several of whom have agreed to stay on. But "pension investing is a people business, and key people have left," says pension consultant John M. Dickson of William M. Mercer Inc. "My expectation is that a lot of clients will leave."

Among the departing executives are the heads of four of the six principal Asset Management operating groups and seven of the firm's 14 top stock pickers. Insiders say the resignations capped two years of stormy relations between the unit and Mellon executives, centering largely on control and decision-making authority. Mellon says it has signed 41 remaining key executives to employment contracts. On Apr. 21, meanwhile, it filed suit against former Asset Management Chairman Desmond J. Heathwood to block him from launching a rival firm. That may slow Heathwood's plans--but it likely won't stanch the flow of assets out of Boston Co.

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