Sep. 24–Information about Bank One’s involvement in the big ongoing mutual fund investigation is coming to light, and there’s a twist.

Bank One had ended its relationship with Canary Capital Partners, a market-timing hedge fund, several months before New York Attorney General Eliot Spitzer released his complaint against four fund companies.

The complaint, filed Sept. 3, claims some mutual funds, including those run by Bank One Corp., Bank of America Corp., Janus Capital Corp. and Strong Capital Management, have given special trading breaks to wealthy investors of Canary Capital. It also notes that Canary stopped its timing activity at Bank One in April. The trading had lasted roughly a year.

Whether investors will view Bank One’s early cutoff from Canary as a reassuring sign might be subject to debate.

It looks better than the Bank of America story. There, the complaint says, Canary continued to time Bank of America’s Nations Funds until July. The trading stopped when Canary received a subpoena from Spitzer.

No firm wants to be implicated in a mutual fund mess that alleges that some funds put profits ahead of small investors.

For now, though, investors and investigators are trying to judge where things were the worst.

So far, Bank One’s role in the Spitzer complaint has let the company take a fairly business-as-usual approach. No one at Bank One has been charged; no one has been fired yet.

Bank One has said it’s not noticed a sizable pickup in calls regarding its 49 mutual funds with $102 billion in assets.

On Tuesday night, business-as-semi-usual meant that Bank One investment officials were to meet with key investors in Detroit at the Gem Theatre. The speakers were Dave Kundert, chief executive officer of Banc One Investment Advisors, and Anthony Chan, chief economist at the company, which is a wholly owned subsidiary of Bank One Corp.

On Monday, Chan told me the focus of the meeting is the investment outlook, not the mutual fund trading investigation.

His message: “This is still what I call a job-terminating economic recovery.”

Chan, who has visited Detroit in the past, maintains that jobs aren’t being added because the demand for goods is limited.

“If nobody’s buying your products, of course you’re going to lay people off,” Chan said.

Chan does not see significant job creation until the second quarter of 2004. But he does see some slight improvement in jobs beginning late this year.

For investors, he says, a slow, steady recovery could be the right ticket. A faster, hotter recovery has a better chance of ending quickly, Chan says.

For Bank One, a slow, steady business-as-usual approach could be just as helpful in dealing with the trading scandal.

The Spitzer complaint says Bank One allowed Canary to actively market-time some of its One Group funds — two international funds, the Small Cap Growth Fund and two mid-cap funds.

While not illegal, market timing can prove costly for small shareholders who end up covering the costs of excessive trading by big-money players.

Bank One has said it is reviewing the trading matter and will take corrective action, if necessary. It also has said it will make restitution if it finds that shareholders were damaged.

And Bank One is the only fund company mentioned in the complaint to have ended the relationship before Spitzer’s involvement.

Brock Vandervliet, an analyst at Lehman Brothers in New York, said he doubts the investigation will have a significant impact on Bank One’s mutual funds.

So far, he says, most individual investors don’t seem to be furious over the trading talk. They don’t seem as angry, he says, as they were a year or so ago over the scandal involving stock research.

The trading issues involving mutual funds are complex. So, it could be hard to put a number on how much money, if any, individual shareholders lost, thanks to extra expenses from frequent trading of some funds.

It’s much easier to recognize a stock analyst who had a buy recommendation on the stock right as it zipped to zero.

“It’s less clear to most people now exactly how this hurt them,” Vandervliet said.

Vandervliet does not own Bank One stock. Lehman Brothers has an investment banking relationship with Bank One. But Lehman Brothers does not own 1 percent or more of Bank One’s outstanding stock.

He maintains that Bank One looks to be in a less-serious predicament in the scandal than Bank of America.

To their credit, the One Group fund managers were complaining about the effects of Canary’s timing activity. The fund managers wanted Canary to reduce the frequency of its trading.

But before anyone thinks that Bank One was pure, read the complaint.

The relationship ended, at least according to the complaint, mainly because Canary wasn’t living up to its promises to invest other money into a Bank One hedge fund.

It fizzled out. Nobody really stamped it out, at least according to the complaint.

And it’s too bad that we don’t read that everyone said the trading arrangement was wrong and had to end, no matter what.

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(c) 2003, Detroit Free Press. Distributed by Knight Ridder/Tribune Business News.

ONE, BAC, JNS, LEH,

Sep. 22–INVESTORS MAY PENALIZE SUSPECT FUNDS: After investors were kicked in the gut by Enron Corp. and other stock scandals, the first civil word that pops into mind when hearing about the newmutual fund scandal is sell.

The second, third and fourth words: Sell, sell and sell.

But let’s go beyond the anger. A complaint filed early this month by New York Attorney General Eliot Spitzer claims some mutual funds have given special trading breaks to wealthy investors of Canary Capital Partners, a hedge fund.

The mutual fund companies listed in the complaint: Bank One Corp., Janus Capital Corp., Strong Capital Management and Bank of America Corp.

Now, it is no surprise to anyone who has ever watched Hollywood on Oscar night that, yes, the wealthy do get better deals than the rest of us. Anybody ever offer to lend you a Harry Winston necklace dripping diamonds?

But the mutual fund allegations are miles away from trivial. If true, we’re talking about a serious breach of trust.

It’s so serious that Morningstar Inc. has suggested that investors consider selling their stakes in funds run by those companies named in the complaint.

“Trust, at the end of the day, is a big part of investing,” said Russel Kinnel, director of mutual fund analysis for Morningstar.

The worst charge: Bank of America is alleged to have let Canary buy or sell funds after the 4 p.m. closing for that day’s price. A former Bank of America broker has been charged with larceny and securities fraud.

Allowing late trading is like betting on an Oscar winner as the actress thanks one and all.

Other funds were said to have allowed the hedge fund to trade mutual funds sometimes daily or weekly. That is not illegal. But it is costly. And fund companies don’t allow most investors to do it.

Morningstar’s sell signal has created a war of letters between Mark Whiston, chief executive officer of Janus Capital, and Joe Mansueto, chairman and CEO of Morningstar. The letters are on Morningstar’s Web site, www.morningstar.com .

Whiston said Morningstar’s recommendation “seems to suggest a certain recklessness and irresponsibility on the part of your company.”

Mansueto said Morningstar’s analysts made the decision to stop recommending Janus funds “only after much thought, deliberation, and internal review.”

Bank One also said it was surprised and disappointed in Morningstar’s remarks.

“Our actions will prove to shareholders and Morningstar that we do put shareholders first,” wrote Dave Kundert, chief executive officer of Banc One Investment Advisors on the site, www.onegroup.com .

Fund companies are doing what they can to limit the damage. On Thursday, Strong Capital Management Inc. announced that it has hired outsiders for a review.

“We are supportive of a thoughtful industry-wide review of this issue by regulators, legislators and industry professionals,” wrote Richard S. Strong, founder and chairman, in a letter to shareholders.

But what does all this really mean to shareholders?

Morningstar isn’t saying that investors will lose money now that charges are flying. “While it’s disconcerting, it’s worth noting that these scandals aren’t going to send these funds down to zero,” Kinnel said.

A mutual fund’s value is based on the stocks held by that fund.

“It’s sort of a shocking thing, but it’s not a crisis,” said Roy Weitz, publisher of FundAlarm.com, an online fund site.

Investors must consider the tax bill that might be associated with selling any funds. And they need to think about other comparable funds in which they might invest the money.

Talk to a financial adviser or research funds at sites such as wwww.morningstar.com .

If you want to sell, consider selling a chunk at a time instead of pulling every dollar out of a fund at once.

But if the fund company in question offers the only stock fund option in your 401(k), well, you might be stuck with that fund.

Look at the performance of your funds, too. The stock market has been doing well and you might have no complaints.

Check www.fundalarm.com to see alerts on what it sees as problem funds.

On a moral note, some financial planners say investors should cash out and send a message.

“Our thought process is we need to penalize those groups. The fastest way to penalize them is by walking,” said Louis Stanasolovich, a certified financial planner who heads Legend Financial Advisors in Pittsburgh.

James Knaus, certified financial planner for LaBrecque, Jackson, Price & Roehl in Troy, said his firm is considering selling questionable funds and replacing them with high-quality, ethically run funds. The firm is reviewing possible replacements for some of Bank One’s funds, known as the One Group. Clients will be given a choice on what moves they may want to make, if any.

“We will not continue to deal with firms who engage in activities detrimental to the investing public,” Knaus said.

“You don’t want to overreact,” Knaus said. “But you also don’t want to be caught in the next wave.”

The fund alarm lists include Strong Blue Chip fund, Bank of America’s Nations MidCap Growth, Janus Advisor Growth, and One Group Large Cap Growth.

A Morningstar report called the Janus connection the “third strike” against the fund family. The funds had a poor bear market performance and some well-respected money managers have left Janus.

Yes, the funky trading is likely to be over now that Spitzer and the Securities and Exchange Commission are cracking down. It’s up to investors to decide if they want to seethe or sell.

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(c) 2003, Detroit Free Press. Distributed by Knight Ridder/Tribune Business News.

ENRNQ, ONE, JNS, BAC,

Sep. 3–Esperion Therapeutics Inc., an Ann Arbor-based company that’s hoping to roll out some blockbuster treatments for heart disease, finds itself in one of the oddest binds around.

An extra-large shareholder will likely need to unload a chunk of Esperion stock. And the reason? This one is a doozy. The investor, a professional money manager, reported in filings with the Securities and Exchange Commission that he had inadvertently bought too much Esperion stock during eight months beginning last November. He owns less than 29 percent of the company, more than he agreed with the company to buy

A mistake?

It’s possible, but it sounds like one squirrelly tale. Money managers know what they’re buying, usually. And you don’t fool around with the SEC and not report big purchases on time, as happened here. And how do you mistakenly buy millions of shares? Time — and investigations — will tell.

A biotech stock, by nature, carries a lot of risk. Esperion has yet to sell any drugs or make any profits. Now, there’s the added unknown of how much any sell-off, even a well-timed one, could sink the stock price.

Last week, Esperion filed a lawsuit in U.S. District Court in Connecticut against the investor, Scott Sacane, a managing director for Durus Capital Management of South Norwalk, Conn. Durus Capital is a hedge fund, an aggressive vehicle used by wealthy institutions and individuals.

Esperion is suing to recover any money Durus, as a major shareholder, might have made out of quick buy-and-sell trades on Esperion stock.

Esperion says it does not know how much money might be recovered. SEC records show intervals when Durus was buying and selling Esperion on the same day.

Sacane, Durus Capital and Sacane’s attorney did not return phone calls.

And the story gets weirder: Sacane also claimed that he inadvertently bought more than 75 percent of Aksys Ltd., a firm that makes a machine for home kidney treatment. TheStreet.com, a financial Web site, reported that Sacane’s hedge fund mainly owns Esperion and Aksys.

Roger Newton, an Esperion cofounder and now president and chief executive officer, told me Tuesday that the company is cooperating with the SEC and providing any necessary information.

The SEC does not confirm nor deny investigations.

Newton says the Durus issue must be addressed to protect the interests of Esperion’s shareholders. But he says the company’s outlook remains the same.

“I look at this as a mild case of indigestion,” Newton said. On Thursday, he’s to speak about the company’s work at the Biotech Industry Conference, a major gathering for investors in New York.

Despite Newton’s assurance, this is a story that should have Esperion shareholders moving cautiously. Figuring out which biotech firm will hit upon the next breakthrough drug is tough enough, analysts say, but now there’s this Sacane saga. Sacane’s own investors could run and force him to sell shares to pay them off.

“Too many cross-currents,” says James Fiore, general partner of Life Science Group, a Connecticut investment firm that focuses on health care.

Fiore’s hedge fund owned Esperion but sold the stock after it tripled in value in the past year and Fiore thought it was moving too far, too fast. He sold the stock before the Sacane details were uncovered in late July.

Now, some money managers are shying away from Esperion because they don’t know how far the stock could fall as Sacane sells off shares. There is no deadline for a sale.

“For whatever reason, you could have up to a third of the company that can come to market,” says Mike Finkelstein, an equity analyst for NorthPointe Capital in Troy. The group manages money for pension funds and others. It looked at the stock but doesn’t own Esperion.

Tim Mayleben, chief operating officer for Esperion, said the company could not say how many shares Sacane would need to sell. Esperion doesn’t see a situation in which millions of shares would be sold suddenly. Sacane and Durus have agreed not to sell or buy shares before Jan. 31, 2004.

“The general thought is that over time we want him to be substantially lower. We’re not saying it’s next month or next year,” said Mayleben, also chief financial officer for the biotech company.

Durus agreed to voting restrictions on its Esperion holdings.

Esperion stock closed at $5.75 a share on Sept. 3, 2002. It had jumped to the $20 range in July, before news about odd trades was revealed.

The price dropped to around $14 a share earlier in August. But it has gained some ground lately and the stock closed at $18.10 a share on Tuesday, up a penny since Friday.

Did the stock soar before July mainly because Durus was buying? Or can the story about potential new drugs drive it higher?

In June, Newton revealed to Wall Street that an experimental injection designed to treat patients with serious heart disease showed promising results.

The therapies are designed to be used by patients who have had a heart attack. The goal is reduce the risk of future heart attacks. The novel treatment mimics the effects of good cholesterol to reduce plaque on artery walls.

“This really could be one of the greatest things that could happen to cardiovascular care,” said Christopher Raymond, an analyst who follows Esperion for Robert W. Baird. Raymond, who doesn’t have an interest in the stock, has an outperform rating on Esperion and a target price of $25 a share.

Charles Polsky, a medical doctor and analyst for William Harris Investors in Chicago, says Esperion’s clinical results, although preliminary, are very encouraging. His firm has held stock in Esperion for about two years or so. It does not hold a sizable amount of the company.

If the stock price falls once Sacane sells, Polsky said his firm would consider buying more.

How in the world did this Sacane mess happen?

Esperion management says Scott Sacane appeared to be a nice, very smart investor in his late 30s. He had a strong background in biotech stocks, too.

“Scott had been a very good shareholder for us,” Mayleben said.

Last November, Sacane reached an agreement with Esperion and said he would own up to 25 percent of the shares in the company — no more.

During the spring, Sacane reported that he owned 21.9 percent of the company.

On July 25, the phone rang.

“He called to tell us he had inadvertently acquired an increased ownership in Esperion,” Mayleben said. The ownership was up to 32.9 percent.

“We were surprised by it. You can conclude that no matter how many rules you put in place, human ingenuity is going to find a way around the rules, ” Mayleben said.

The troubling news was discovered days before Esperion was to launch an offering of another 4 million shares. Fortunately, the additional stock was sold.

Esperion management says the Sacane saga could be short-lived. The long-term pluses: CEO Newton was part of the team that discovered Lipitor, a cholesterol-lowering medication that Pfizer Inc. markets. Analysts expect Esperion’s promising drugs to reach the market possibly by 2007 or 2008.

“We think and hope this is going to be a bump along the way here,” Mayleben said.

Small bump or not, even Mayleben admits his first reaction to the July 25 phone call was that this was peculiar. He still can’t figure out how this happened.

“We honestly don’t know. And everybody we talked to can’t figure it out either,” he said.

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(c) 2003, Detroit Free Press. Distributed by Knight Ridder/Tribune Business News.

ESPR,