- The Washington Times - Friday, September 5, 2003


Federal securities regulators are seeking information from most of the nation’s mutual fund companies as part of a new inquiry into after-hours and short-term trading following a complaint from New York’s attorney general charging widespread fraud in the industry.

The Securities and Exchange Commission has asked the companies to supply information by Sept. 15 on their policies governing the use of market timing and late trading, an SEC official said yesterday on the condition of anonymity.

If charges raised by New York Attorney General Eliot Spitzer prove true, the companies will face the maximum civil penalties, officials said.

Mr. Spitzer announced Wednesday that hedge fund Canary Capital Partners agreed to pay $40 million to settle charges that the firm made special arrangements with several leading mutual fund families to use the improper trading techniques. The funds — Bank of America Corp., Bank One Corp., Strong Financial Corp. and Janus Capital Group — have said they are cooperating with investigators.

Dozens of other mutual fund companies have been subpoenaed in the case, including Vanguard Group, the nation’s second-largest fund manager, and Invesco Funds Group, a subsidiary of British asset manager Amvescap. Both firms said they were cooperating with investigators.

Market timing is a technique involving short-term, “in and out” trading of mutual fund shares, which is detrimental for the long-term shareholders for whom mutual funds are designed. While not technically illegal, the practice is prohibited by many mutual funds.

Late trading, which is prohibited by federal regulations and New York’s Martin Act, involves purchasing mutual fund shares at the closing price after the New York markets shut down. Mutual fund shares are priced once a day, and under ordinary procedures, shares purchased after 4 p.m. EDT are held in reserve and sold at the next day’s price.

In exchange for big-money investments, Mr. Spitzer said, the mutual funds in the Canary case bent the rules applied to most investors and allowed the hedge fund to make after-hours trades and “in and out” transactions. This sort of illegal arrangement is widespread within the mutual fund industry, Mr. Spitzer’s complaint charged, and could be costing average long-term shareholders billions each year.

Upon hearing Mr. Spitzer’s announcement, SEC Chairman William Donaldson condemned the reputed misconduct as “reprehensible” and said it further illustrated the importance of his agency’s ongoing review.

The charges also outraged investors. Shareholders of several Janus funds have filed a lawsuit charging the firm violated its fiduciary duties to customers by making such a deal with Canary. The lawsuit, filed yesterday by the New York firm of Bernstein, Liebhard & Lifshitz, seeks damages on losses related to improper late trading.

In Massachusetts, regulators were seeking documents and correspondence from the Boston office of Prudential Securities Inc. related to the use of market timing. The firm was subpoenaed for the materials Thursday, a spokesman for Secretary of State William Galvin said.

Prudential said it was cooperating fully with investigators. A Prudential spokesman said the firm’s brokers use market timing only with funds that allow it.

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