Sep. 5–The Securities and Exchange Commission took immediate and sweeping action yesterday to ensure mutual funds and investment banks don’t engage in fraudulent after-hours trading.
Just a day after state Attorney General Eliot Spitzer announced a $40 million settlement with a hedge fund over such trading, the SEC sent out letters to all major banks and mutual funds asking them to explain their safeguards against illegal trading.
The letters were sent to firms holding some 75 percent of all assets under management in the country. The agency will also conduct on-site inspections, an SEC official said.
Additionally, SEC chairman William Donaldson plans to send letters to the Investment Company Institute, the Securities Industry Association, and others reminding them about the seriousness of the charges.
“The SEC has the weight of a 900-pound gorilla,” said Thomas Joo, a professor and corporate governance expert at the University of California at Davis. “You may need people like Eliot Spitzer to get them to move.”
The SEC’s action quickly follows Spitzer’s move into this area that had been an ongoing focus of SEC interest in the past.
Still, while the SEC had addressed the problem of questionable trading practices in the last few years, it hadn’t made formal requests for information from the funds — until yesterday.
The SEC and Spitzer’s office both said they would collaborate, as they had with the probe of biased Wall Street research.
“We are in communication with the SEC and we will be both coordinating and cooperating with them as we move forward,” said Spitzer spokesman Darren Dopp.
Spitzer claimed a hedge fund run by Edward Stern, son of billionaire Leonard Stern, used illegal trading designed by Bank of America and others to buy mutual funds at advantageous prices at the close of trading each day.
Stern, Spitzer said, could buy mutual fund shares at prices that reduced the profits of other, small investors in the fund.
The banks and mutual fund companies, including Janus, allowed Stern to trade in and out of their funds in exchange for giving them other business, such as investing in their bond funds, Spitzer said.
These arrangements put the banks in violation of their duties to their shareholders, the attorney general said.
Spitzer said Stern, who didn’t admit wrongdoing, is cooperating in a broader probe of mutual funds.
Shares of Bank of America fell $1.76 to $76.24, while Janus plunged $1.28 to $15.60 and are down 13 percent in the past two days.
“We’re reviewing instances where frequent trading may have occurred to ensure that we continue to put the best interests of our fund shareholders first,” Janus CEO Mark Whiston wrote in a letter to shareholders.
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BAC, JNS,
