Dec. 3–A company with deep Atlanta roots has been caught up in the scandal ripping through the mutual fund industry.
New York Attorney General Eliot Spitzer and the Securities and Exchange Commission filed civil charges Tuesday against Invesco Funds Group and its president, alleging fraud related to market timing. The state of Colorado filed similar charges against Invesco.
Regulators said some investors were allowed to jump in and out of Invesco funds at the expense of ordinary investors, and that the practice wasn’t properly disclosed in fund prospectuses.
Invesco is part of Amvescap, a London-based company that is run from Atlanta. Amvescap said the charges against Invesco and Raymond Cunningham, the president of the unit, “are without merit.” The company added that unlike late trading, which is illegal, “market timing is a lawful activity.”
Market timing involves moving in and out of an investment to profit from developing news. Amvescap has acknowledged it permitted market timing but did so in order to maintain some control of the practice.
Late trading, which Amvescap has said it did not allow, is the practice of letting investors buy or sell at advantageous prices not available to all investors.
If Spitzer and the SEC make their cases, Invesco potentially could face millions of dollars in penalties, according to the SEC. The allegations alone could scare some investors away, according to analyst Dan Culloton of Morningstar, which tracks the fund industry.
Spitzer, who has led a drive against abuses in the mutual fund industry, said top Invesco managers “knew marketing timing was harming buy-and-hold investors, but they condoned and facilitated it because it was a lucrative source of management fee revenue.”
The complaint filed in New York state court estimates the damages to other fund investors were at least $160.8 million.
One of the investors that regulators charge was granted special trading privileges is Canary Capital Management. The hedge fund earlier reached a settlement with Spitzer’s office on allegations of improper fund trading in other cases.
Amvescap, which is led by Atlantan Charles Brady, announced last week that it expected to be charged by regulators. On Tuesday, the company said the Invesco unit “always acted in good faith and in compliance with its prospectuses, its legal obligations, and most importantly, its fiduciary duty to fund shareholders.”
Not so, said Stephen Cutler, director of the SEC’s Division of Enforcement. He said that by “granting special trading privileges to selected customers, (Invesco and its president) readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds’ prospectus disclosures on market timing.”
The SEC’s complaint was filed in federal court in Denver, where Invesco is based.
Cunningham was the only individual charged in the civil suits, and only Invesco was named among Amvescap’s units. Amvescap also owns the AIM fund family.
“What we’re looking at is certainly Denver-centered,” said Amy Norwood, assistant regional director in the SEC’s regional office.
The three complaints filed Tuesday seek a halt to the trading practice, disgorgement of fees earned in the practice, and unspecified fines and penalties.
If the SEC can prove fraud as well as actual or potential damages, an individual can be fined up to $100,000 per incident and a corporation as much as $500,000, Norwood said.
The company that is now Amvescap started as the investment advisory business of Citizens and Southern National Bank in Atlanta. Brady is now chairman. He and colleagues at the bank bought the business from the bank and later sold it to Invesco MIM, now Amvescap.
Today, Midtown is home to about 50 Amvescap executives. About 360 people work there for Amvescap Retirement, a back-office operation that handles administrative details for about 1,500 retirement plans. About 280 others work nearby at Invesco North America, which manages money for pension funds, foundations and other institutional investors.
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