H.S. Grace & Company, Inc.
Case Studies

Independent Compliance Consultant for Family of Mutual Funds
Overview: H.S. Grace & Company, Inc. (HSG) was hired to serve as an independent compliance consultant to a family of mutual funds as part of an SEC settlement over allegations of market-timing. The company operated a mid-sized family of mutual funds with three subsidiaries: a registered investment advisor, a registered broker-dealer and a registered transfer agent. HSG's role was to review the company's supervisory, compliance, and other policies and procedures designed to prevent and detect breaches of fiduciary duty, breaches of the code of ethics and federal security law violations.

Result: Our final report included findings relative to needed improvements in policies and procedures and also included observations and suggestions that, while not necessary to achieve regulatory compliance in and of themselves, were helpful in improving governance and strengthening internal controls.

Bank Responsibility as Bond Indenture Trustee
Overview: During bankruptcy proceedings of a major telecommunications firm, bond holders with $500 million in exposure sued the bank saying it failed in its duty as the bond indenture trustee. In its analysis, HSG defined the role of an indenture trustee, finding its scope much narrower than the plaintiff was claiming. We also found that the company issuing the bonds conducted itself appropriately but was caught in a market situation that caused it to fail and that its failure to repay the bonds was not related to the trustee bank's action or inaction.

Result: Satisfactory settlement during trial.

Pension Fund Structure and Operation
Overview: HSG was retained when a pension fund sued the bank as an indenture trustee alleging failure of duty. Our analysis found that the pension fund was overly aggressive and losses were a result of its own mistakes in judgment, including conflicts of interest involving the board of trustees. We analyzed the alleged damages and found them overstated, with problems in both the calculations and choice of model. HSG also participated in preparation for and attended the deposition of the pension fund's former executive director.

Result: Highly satisfactory settlement after mediation.

Failure of Specialized Financial Institution
Overview: This specialized financial institution, which handled periodic insurance premium payments, failed and HSG was hired to determine why. We carefully examined all the working of the institution and discovered that its senior officers were skilled at raising funding through syndications, but lacked the operating experience to direct the institution.

Result: Satisfactory resolution of various disputes and litigation which arose from the failure.

Directors' and Officers' Role in Bankruptcy
Overview: A large mortgage company with a subsidiary that acted as a clearinghouse for other mortgage companies entered into bankruptcy for the second time. Plaintiffs alleged mishandling of investments and that risks were hidden by certain board members and senior management. HSG's analysis showed that the investment activities were appropriate, that the losses were market driven and that management had kept the board properly advised of actions and associated risks.

Result: Favorable settlement for defendant following mediation.