Federated Investors Inc. will take a $20 million charge on fourth-quarter earnings to establish a fund for investors and pay for an internal review of mutual fund trading practices, the companyannounced Tuesday.
Federated also said it had punished three officers, two money managers and fired an employee for improper trading. The Pittsburgh-based fund said it is setting aside $7.6 million to pay for any damages to funds or shareholders caused by the trades.
Additionally, the company acknowledged that two portfolio managers made personal trades in 401(k) funds they managed, but said the fund did not suffer as a result.
The disclosures follow the company’s announcement in November that a small number of employees had improperly accepted more than 100 illegal, after-hour trades and that two officers were involved in an arrangement that allowed hedge fund operator Canary Capital LLC to market time Federated’s domestic funds 46 times over a five-month period.
Canary Capital agreed to a $40 million settlement with regulators last year following allegations it engaged in late trading, which is illegal, and market timing. Market timing, a type of quick, in-and-out trading, is not illegal but discouraged by many funds companies – including Federated – because it skims profits from other shareholders. Regulators have indicated that funds which restricted market timing but made exceptions for some clients committed fraud.
Federated has not been charged with any wrongdoing.
Also Tuesday, Federated said that employees had been accepting after-hour trades for more than four years, potentially allowing trades using the previous day’s prices.
One employee placed orders ranging from less than $100 to $26,000 between January 1999 and March 2003, Federated said.
The employee has been fired, Federated said.
Late trades by employees had no “material impact” on the funds and accounted for a fraction of 1 percent of total orders processed, the company said.
The company is still in the process of determining how much the improper trades cost shareholders. Reimbursement for those costs will come out of the $7.6 million fund.
The charge to fourth-quarter earnings does not include potential fines by regulators or lawsuits. Eight civil lawsuits have been filed against Federated related to the trading.
Separately, the company said it is spending $12.4 million to review its trading practices, including a contract with Cornerstone Research which will assess the impact of improper trading on its funds.
“During the course of the review, Federated identified deviations from our standards and procedures,” company president and chief executive J. Christopher Donahue wrote in a letter to shareholders Tuesday. “These deviations are contrary to the Federated culture and the ethics that we have made a cornerstone of the company throughout our history and we regret their occurrence.”
An SEC spokesman declined to comment on whether Federated was being investigated.
Shares of Federated closed up 71 cents at $31.91 on the New York Stock Exchange.
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