Looks Like Affirmative Inaction

Wall Street brokerage houses, never known as bastions of diversity, are under growing pressure to do business with firms owned by minorities and women. The California Public Employees' Retirement System (CalPERS), which manages $90 billion in pension funds, encourages its money managers to ensure that 15% of their trades are executed by minority-owned firms, 5% by women-owned firms, and 2% to 3% by disabled veteran-owned firms. But these efforts can backfire. Case in point: Oppenheimer Capital, which manages $32 billion, has enraged some minority- and women-owned brokerage firms.

The controversy began last March when Oppenheimer Capital invited minority- and women-owned firms to apply to do business with it. A Mar. 9 letter to prospective firms obliquely described the arrangement: Oppenheimer Capital would send a portion of its brokerage business to Emmett A. Larkin Co., an Asian-owned firm in San Francisco. Larkin would execute and clear all the trades, then forward a portion of the commissions to the other firms, which would have nothing to do with the orders. As the letter put it, "Larkin will then send commission checks to your firm as designated by Oppenheimer Capital." Says an irate Leopoldo E. Guzman, who heads Miami-based Guzman & Co.: "It is a handout. They've set up a little hot-soup window and said, `Don't mix with the real broker-dealers."' Larkin didn't return calls.

Why would Oppenheimer do this? The sister company of Oppenheimer & Co., the large Wall Street brokerage firm, declined comment. But sources close to the firm provide this rationale: It wanted to be able to represent accurately to its public clients that it had paid minority firms. At the same time, say the sources, Oppenheimer Capital believes that its main obligation is to its clients, and that a number of the small firms seeking business don't reliably answer their phones during business hours, much less have the expertise to execute large trades. Further, Oppenheimer expects to receive research from the nine minority- and women-owned firms it recently selected; these include WR Lazard & Co. in New York, which declined comment, and HCM Investments Inc. in Chicago, which says it believes that it will be executing trades for Oppenheimer and providing research.

NO PROBLEM.. Guzman and executives at such women-owned firms as Muriel Siebert & Co. in New York and Western Select Securities Inc. in San Francisco are outraged. They want a chance to prove themselves by executing trades for big clients. There are other money managers that have programs employing small firms to execute trades. For example, Boston-based State Street Global Advisors, with $70 billion in equity portfolios, chose 8 to 10 minority- and women-owned broker-dealers that they do business with, plus 80 to 100 other firms. Chris Hynes, managing director at State Street, says money managers tend to see the rules about using minority-owned firms as a problem, but "we looked at it like an opportunity." Oppenheimer's use of minority firms, unfortunately, could well become a liability.


How Oppenheimer does business with minority firms

-- Oppenheimer Capital selects nine minority- and women-owned firms to handle a portion of its brokerage business.

-- But instead of apportioning the business among all nine firms, it sends all the trades to just one firm, Emmett A. Larkin Co., which executes and clears the orders.

-- Oppenheimer directs Larkin simply to send commission checks to the other firms, though they have no involvement with the trades. Sources say Oppenheimer feels small firms lack sufficient expertise to handle the trading business.