Regulators charged Invesco Funds Group Inc. and its chief executive with civil fraud, saying the company set up an intricate system to recruit big-money market timers despite complaints from its ownemployees that shareholders were being harmed.
Later Tuesday, Strong Financial Corp. founder Richard S. Strong announced he was stepping down from the company and its mutual funds, following months of pressure about his questionable trading that some regulators have indicated could lead to charges.
In separate filings, New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission accused Denver-based Invesco and CEO Raymond Cunningham of defrauding shareholders by allowing certain clients to engage in market timing – frequent, short-term trading that skimmed profits from long-term shareholders – despite policies against the practice.
Regulators are seeking the return of nearly $161 million in fees they say Invesco collected from investors in the funds involved, as well as unspecified civil penalties.
“IFG and its CEO willingly sacrificed the interests of mutual fund shareholders when market timers dangled the prospect of higher management fees in front of them,” said Stephen M. Cutler, director of the SEC’s enforcement division. “By granting special trading privileges to selected customers, they readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds’ prospectus disclosures on market timing.”
Invesco Funds denied wrongdoing and said it would “vigorously” contest the charges. A call to Cunningham’s lawyer was not immediately returned.
Strong’s resignation, which included a statement saying he would divest control of his company, followed disclosures in October that he had made short-term trades in Strong funds for his own benefit and that of friends and family members. He has not been charged with wrongdoing, but regulators including Spitzer have indicated charges are possible.
Strong stepped down as chairman, chief executive and chief investment officer of Strong Financial Corp., and from the boards of the company and its funds. He had previously resigned as chairman of the funds’ board of directors, but remained on the board, saying he did not believe the trades hurt shareholders.
A spokesman for Spitzer’s office had no comment on Strong’s resignation other than to say it would not affect the investigation.
Kenneth J. Wessels, former president of the Dain Rauscher Wessels Capital Markets division and director of Dain Rauscher Corp., will replace Strong as chairman and CEO. Richard T. Weiss, Strong’s portfolio manager, will lead the investment department.
The investigation by federal and state authorities into market timing and other improper fund trading has already ensnared Putnam Investments and the founders of the Pilgrim Baxter mutual fund family. Dozens of other companies have been subpoenaed.
Market timing is not illegal, but is strictly limited by most fund companies because it can skim profits from longer-term shareholders and increase transaction fees. Authorities contend that funds that made selective exceptions committed fraud.
The prospectuses for Invesco funds restricted fund trades to four a year, but authorities allege big clients were exempted as part of a “Special Situations” program that became an increasing part of Invesco’s strategy in 2001 as the market was falling.
Participating customers were allowed to market time certain funds as long as they invested at least $25 million with Invesco and agreed to keep money in Invesco bond or money market funds. That helped Invesco increase its overall assets and the fees it received.
The program even had its own application form, according to the filings, which also state that by mid-2002, Invesco had approximately $900 million in timing assets – accounting for roughly 5 percent of its $18 billion in total assets.
One of the “Special Situation” clients was Canary Capital LLC, the hedge fund operator that earlier this year agreed to pay $40 million to settle New York state charges that it engaged in improper trading.
Cunningham helped negotiate the Canary deal and “actively encouraged” selective market timing, the SEC complaint said.
The filings Tuesday allege that between June 2001 and June 2003, Canary made about $50 million – a 110 percent return – market timing the Invesco Dynamics fund, while long-term shareholders lost 34 percent.
By 2003, company managers – including chief investment officer Tim Miller, who was required to sign off on all market timing – had become more critical of the practice.
Canary and market timers “are costing our legitimate shareholders significant business,” Miller wrote in a 2003 e-mail included in the New York complaint. “This is NOT good business for us, and they need to go.”
Miller has not been charged.
Colorado Attorney General Ken Salazar sued Invesco in state court Tuesday, accusing the company of lying to investors by failing to disclose the market timing arrangements and by stating that it discouraged such practices. Invesco could face millions of dollars in fines for violations of the state’s consumer protection laws.
Invesco is owned by London-based Amvescap PLC, which also operates the AIM and Atlantic Trust brands. Amvescap had $345.2 billion in funds under management as of Sept. 30. According to the complaints, Invesco, which serves as the investment adviser for 49 mutual fund companies within the Invesco fund family, had combined assets of $18 billion as of November 2002.
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Associated Press Writers Jon Sarche in Denver and Carrie Antlfinger in Milwaukee contributed to this report.
