MFS agrees to settlement
Fund to pay $350 million in trade scandal
By JUSTIN POPE Associated Press
Friday, February 6, 2004
Boston — The company credited with inventing the mutual fund 80 years ago was formally swept up in the fund trading scandal Thursday, as Massachusetts Financial Services agreed to relinquish $350 million in an agreement that also forced out two top executives.
The agreements reached with the Securities and Exchange Commission and regulators in New York and New Hampshire also restrict MFS chief executive John Ballen and president Kevin Parke from certain types of jobs in the fund industry for three years.
Late Thursday, MFS’ parent company named Robert J. Manning, previously chief fixed income officer, as MFS’ new chief executive. In a brief statement, Toronto-based Sun Life Financial also expressed satisfaction with the settlement, which does not include any admission or denial of wrongdoing by the company, Ballen or Parke.
MFS will pay $175 million in restitution to investors and $50 million in penalties, as well as reduce fees charged to shareholders by $125 million. Separately, Ballen and Parke will each pay a $250,000 penalty and more than $50,000 in profits from the company’s practices.
MFS is the latest mutual fund company to settle with regulators in a scandal that has engulfed the $7 trillion fund industry and resulted in investigations of dozens of fund companies. It is the nation’s No. 11 fund company, with about $140 billion under management, and operates what some consider the oldest mutual fund: the Massachusetts Investor Trust, introduced in 1924.
The settlement with MFS is smaller than the one imposed in December on Alliance Capital Management, which included $600 million in fines, restitution and fee reductions. But the suspensions of such high-ranking officials makes this settlement among the most serious civil enforcement actions yet. Top executives at such firms as Pilgrim Baxter and Putnam Investments have lost their jobs, but not directly at the insistence of the SEC.
MFS acknowledged in December allowing market-timing trades in 11 funds, including Massachusetts Investor Trust, after being notified by the SEC and New York authorities that it would likely face civil fraud charges.
Market timing is a type of quick, in-and-out trading that skims profits from longer-term shareholders. It is not illegal, but regulators say MFS violated its own fund prospectuses — and defrauded investors — by widely tolerating the practice for some customers but not others.
Strong implicated, too
New York Attorney General Elliot Spitzer in early September implicated Strong Capital Management Inc. in providing special treatment to a New Jersey hedge fund. Unlike MFS, though, Strong’s prospectuses did not say the firm prohibited short-term trading in its funds.
Two months later, Spitzer said founder and top executive Richard S. Strong had traded in and out of his firm’s funds and suggested he was considering taking action, not ruling out criminal charges. Spitzer has convened a grand jury to consider evidence against Strong, and the grand jury has been hearing evidence for several weeks about his short-term trades, according to people briefed on the proceedings.
MFS, with $140 billion in assets, is more than three times as big as Strong, which had $37.5 billion of assets under management at the end of last year.
Kathleen Gallagher of the Journal Sentinel staff contributed to this report.
