BlackRock’s Screw-up with Dan Rice & Rice Energy

Time for a brief distraction from the troubles Chesapeake has had of late—so let’s focus on a new “problem.” That would be the public relations kerfuffle Rice Energy and its founder Dan Rice are facing in the press.

Dan has been the single most successful mutual fund manager in the United States over the past 10 years. He is co-manager of five energy-related funds for BlackRock. But not any more.

You see, Dan founded and is general partner for Rice Energy, a drilling company run by his sons and focused on the Marcellus Shale in Pennsylvania. Rice Energy has acquired enough leases since its founding in 2005 that it will be able to drill a projected 200-250 wells.

Dan’s problem is not that he had a side job helping his sons get the company started, but that the company he started (and is a general partner for) competes with some of the same companies that he invests in. And one of those companies, Alpha Resources, is partnering with Rice on drilling ventures. Dan’s BlackRock mutual funds have invested a fair bit in Alpha.

But the real problem is not that Dan hide any of this from BlackRock—he told them all about it. The real problem is that BlackRock never told investors about Dan’s potential conflict of interest. Because BlackRock screwed up, they’ll now fire Dan.

Rice disclosed these activities to executives at BlackRock, but the money management firm never told fund shareholders about them. A BlackRock spokeswoman declined to explain why the company concluded it was not required to tell fund investors about the arrangement.*

*The Boston Globe (Jun 19, 2012) – Manager steps down amid controversy