The Beginning of a Beautiful Friendship

19May16

In the course of his scrambling, this time on the Charles River golf course, Morin made the acquaintance of Jay Lennon, the secretary and treasurer of Federated Fund of New England, a small mutual fund company based in Weathersfield, Connecticut that was owned by Lennon’s father, James E. Lennon.[1] Lennon was a tall, handsome Irishman, a fabulous salesman with great charm and an even greater tenor voice. Lennon and Morin hit it off well, and soon Morin counted Federated Fund of New England as a corporate client – although at the time, he didn’t know a thing about mutual funds, relatively obscure investments that were regulated by the Investment Company Act of 1940. By 1955, the company had a modest $1.3 million under management and hadn’t grown much since its inception.

In that year, Jack Donahue and Richard Fisher, two young mutual fund salesmen from Pittsburgh, approached Lennon with the idea of buying into the company and growing it aggressively. Both were experienced fund salesmen for national leader King Merritt & Company. (Donahue had an uncanny nose for talent and character, and coaxed his high school friend Fisher away from his position as a Cadillac salesman to join him at King Merritt.) But they were chaffing at the bit to own their own management company.

In the course of their extensive negotiations with the Lennons, Donahue and Fisher were impressed with Lennon’s counsel – who only a short time earlier had admitted that he didn’t know what a mutual fund was, but nonetheless closed the transaction with expertise and class. Donahue and Fisher were joined by King Meritt sales manager Robert Word and his associate, Paul Warren. Another high school classmate, Tom Donnelly, became their legal advisor.

Given Donahue’s eye for talent, once the transaction was closed, he asked Morin to prepare the new company’s SEC registration statement. Thus began a personal and professional relationship that would expand, deepen and thrive until the day of Morin’s death.

The first Federated Investors registration statement, dated March 31, 1956, reflected net assets of $1,181,638, barely more than the $1 million minimum necessary for registration, and expenses for legal services in the amount of $300.

Federated’s early days were tenuous. Problems managing a national sales force that was paid commissions, frequently on income that did not materialize, left Federated dangerously undercapitalized. As broker-dealers in the securities business, they were required to maintain a certain ratio of debt to capital (underwriting debt could not exceed capital by more than 20 times). In the early days, they had difficulty maintaining the ratio. At one point, in order to meet its obligations and maintain the ratio, the executives stopped taking salaries and instead “borrowed” money from the company and gave promissory notes back, so that the notes would show up as assets instead of expenses. After a while, the notes payable to the corporation from its officers were the only “assets” the corporation had – that was its “capital.” Some SEC auditors reviewing their filings took issue with this, and Federated asked Morin to deal with the problem. Morin turned to his old law school companion, Brad Morse.

Morse had returned to his hometown of Lowell after graduating from law school. After serving as a private practice lawyer, business executive, law clerk to Chief Justice of the Supreme Judicial Court, and professor at Boston University School of Law, he won a seat on the Lowell City Council in 1952. In 1953, he was invited by Massachusetts Sen. Leverett Saltonstall to join the staff of the Armed Services Committee (which Saltonstall chaired). He was Saltonstall’s executive secretary and chief assistant in 1955, when Morin called.

Morin explained the problem. Morse called Sinclair Armstrong, who was then the SEC chairman, and asked that he see Morin. At that meeting, Morin laid out the issue, and Armstrong and his people listened politely, but in the end, they explained that he needed to go to the regional administrator – where he should have gone in the first place.

While this problem simmered, another fire was smoldering to life. From its earliest days, Federated was involved in a program of selling investment plans to enlisted soldiers on military bases around the country (as Donahue had done in his very first experiences in the business). They had worked out an automatic payroll deduction plan where any enlisted man could have $20 a month taken from his pay and invested in this mutual fund program. Some of the Army brass didn’t like it and began creating political problems through the Pentagon, and Federated asked Morin to help them with that problem as well.

It was time for Morin to visit his old Army boss, General Hickey. He took the Federated people down to Atlanta to get some “advice” from the General. In the course of the meeting, Hickey told Morin’s clients about his childhood missions on Roxbury Hill, and informed them that his battlefield companions, Denny Delaney and Phil Kendrick, just happened to be regional commissioner of the Bureau of Internal Revenue, and regional administrator of the SEC, respectively.

Would General Hickey be so kind as to arrange a meeting with Regional Administrator Kendrick? Hickey picked up the phone, called Kendrick and asked him to see Chuck Morin.

Morin was very soon sitting in front of Kendrick. The first thing he asked Morin was, “how well do you know Tom Hickey?” Morin spent fifteen minutes recounting their years in the war together.

Kendrick said, “Why didn’t you come to see me in the first place instead of going to see those guys in Washington?”

Morin said, “You know about that?” And Kendrick assured him that he had heard all about the Washington meeting.

Morin explained the whole problem with Federated’s “capital” consisting of promissory notes from its officers. Kendrick look at Morin and said, “I’ll tell you what – I’m going to ask you a question and if the answer is ‘yes,’ you’re alright, and I want you to give me an honest answer.”

Morin agreed.

Kendrick asked, “Are those notes good? Are they going to be repaid?”

Morin swallowed and said “yes.”

Kendrick said, “Fine, now get out of here. But not until we finish talking about Tom Hickey.”

And Morin stayed with Kendrick for another hour or so, swapping tales about their adventures with Gen. Tom Hickey, the child and the man.

So Morin’s meeting with his old General solved two problems at once. But there would be more skirmishes with the SEC down the line.

__________

[1] New Horizons – The Story of Federated Investors, Jeffrey Rodengen (Write Stuff Enterprises, 2006), p. 18.

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