The government investigation into mutual fund wrongdoing expanded to Alliance Capital Management on Tuesday, and the fallout from the scandal began to spread to retirement plans.
Alliance Capital, the 25th-largest fund complex, said it has suspended two executives after finding conflicts of interest related to mutual fund trading. The New York-based firm also said it has been contacted by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer in connection to their ongoing mutual fund inquiry.
Spitzer says the mutual fund arms of Bank of America and Bank One, and mutual fund providers Strong Financial and Janus Capital, allowed a hedge fund, Canary Capital Partners, to profit at the expense of mutual fund investors.
Janus and Strong have apologized, and Janus even vowed to reimburse investors. But the wrongdoing has tarnished the reputations of firms implicated in the scandal, experts say. Employers and managers of 401(k) plans have a particular duty to take into account such issues as they look out for the interests of workers.
Standard Insurance, a Portland, Ore., retirement plan manager, says it will drop Janus funds from its retirement plan investment options as of Dec. 19, in part because of the allegations. About $185 million of the $2.1 billion in 401(k) assets that the company oversees is invested in Janus funds.
”I’d be surprised if a lot more money doesn’t leave,” says Mark A. Davis, a retirement plan consultant in Thousand Oaks, Calif.
It is unclear how far the scandal will spread. On Tuesday, SEC Chairman William Donaldson said that his agency has sent information requests to the 80 largest mutual fund companies and to brokerage firms. In remarks before the Senate Banking Committee, he said he is considering whether new rules are necessary to thwart abuses.
Alliance Capital refused to elaborate on the nature of the conflicts of interest it uncovered, except to say they related to market timing transactions. Though the company also declined to name the suspended executives, it did say one is a portfolio manager of the AllianceBernstein Technology fund. The other is involved in selling hedge fund products.
According to information on the Alliance Capital Web site, the technology fund manager is Gerald Malone. ”He’s managed the fund for more than a decade,” says Brian Portnoy, senior fund analyst at the research firm Morningstar. ”In the world of tech funds, that’s an eternity.” Under Malone, the fund has been a solid performer. Its top holdings include Microsoft, Intel and Dell.
Alliance Capital has been in hot water before. It is being sued for its pension fund investments in energy trader Enron, in bankruptcy protection. On Tuesday, Alliance Capital’s shares fell $2.04 to $33.49.
