Nov. 7–New York Attorney General Eliot Spitzer intensified his investigation into the problems plaguing the mutual fund industry even as talks continue with several funds into possible settlements.
Spitzer’s office has more than 100 subpoenas for information pending and more research is needed before settlements can reached, a source familiar with the investigation said yesterday.
The source added that any conclusion would not be similar to the global, $1.4 billion analyst conflict-of-interest settlement against Wall Street brokerage houses reached last year. However, Spitzer has said in testimony that mutual fund companies would have to implement numerous reforms — particularly giving up any improper gains made from trading.
Last month, Spitzer and the Securities and Exchange Commission said that four companies were involved with allowing a hedge fund to improperly make short-term trades in and out of their mutual funds. Those funds have not been formally charged with wrongdoing but are involved with ongoing investigations.
Spitzer’s office is also considering action against Strong Capital Management founder Richard Strong, and even possible criminal charges, a source said. Strong reportedly has made many short-term trades out of his firm’s own funds for his own account and in those of his family and friends, taking in $600,000 in profits. Strong has resigned as chairman of the mutual fund division.
Spitzer and the SEC have already settled several cases, including those against former executives at mutual fund firm Fred Alger & Co., hedge fund Millennium Partners, LP, and an official at Bank of America on charges related to mutual fund trading.The agency also is broadening its investigation to look at how mutual fund managers handled allocations of initial public offerings, said John Nester, a spokesman for the SEC.
That investigation would look at whether the same fund manager who oversees both a hedge fund and a mutual fund unfairly gave shares of an IPO that was “hot,” one whose price is expected to jump dramatically, to a hedge fund rather than the mutual fund they manage. However, certain mutual funds are prohibited from investing in IPOs, so each case would have to be looked at closely.
In testimony before Congress yesterday, Massachusetts Secretary of the Commonwealth William Galvin said he wants to prosecute Putnam Investments and Prudential Securities Inc., two companies he has brought charges against for improper trading of mutual fund shares. At a hearing today before the House Financial Services capital markets subcommittee in Washington, D.C., Galvin said he didn’t want a settlement allowing the companies to deny any wrongdoing. “We intend to take these cases to trial,” Galvin said.
The National Association of Securities Dealers vice chairman Mary Schapiro, who also testified before the congressional subcomittee yesterday, said the organization is pursuing 12 investigations into whether brokerages promoted certain mutual funds in exchange for trading business, and expects to bring a major case against a brokerage soon.
“We will be announcing a major case very shortly, in the next several weeks,” Schapiro said in testimony.
Reuters contributed to this report.
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