Investors yanked money last month from some funds involved in the widening mutual fund scandal. And regulators say they are about to crack down on funds that allowed abusive trading practices.
Regulators say they are targeting illegal late trading and pursuing legal avenues to hold funds accountable for preferential market timing. The next fund group could be charged as early as today: New York Attorney General Eliot Spitzer may file criminal charges against employees at Fred Alger Management, which operates the Alger group of funds. The company couldn’t be reached for comment.
Regulators say they also are investigating mutual funds that have divulged portfolio holdings to hedge funds. If the hedge funds profited from such non-public information, they could be guilty of inside trading, says Paul Roye, chief mutual fund cop at the Securities and Exchange Commission. Mutual funds that selectively disclosed portfolios could be guilty of aiding inside trading.
Although market timing isn’t illegal, regulators plan to take action. ”We haven’t intended to give fund companies absolution,” says Spitzer, who last month settled charges with hedge fund Canary Capital that it engaged in illegal trading with several fund companies.
If a fund prospectus prohibits market timing — rapid, in-and-out trades in a fund — then exceptions could be fraud, regulators say. And even if a mutual fund hasn’t banned market timing, regulators could charge it with breaching its fiduciary duty, they say.
Though the focus has been on hedge funds and brokers, Massachusetts regulator William Galvin says it’s hard to believe fund firms weren’t aware of market timing. ”To make it worthwhile, you have to be moving large sums,” he says. The SEC also is looking at fund directors to see if they ignored red flags.
Although stock funds overall took in an estimated $26 billion in new investments in September, vs. $23 billion in August, investors defected from some funds implicated in the probe. Janus Capital was the hardest hit. Janus, named in Spitzer’s complaint against Canary Capital, admits that it allowed market timing by some large investors.
Lipper, the mutual fund tracker, estimates that investors pulled $2.3 billion, or about 2.8% of the $77 billion in Janus stock funds. About $121 million left Alliance stock funds in September, Lipper says — about 0.4% of its $33 billion in stock fund assets.
The company last month suspended two employees, including the manager of the AllianceBernstein Technology fund, over alleged conflicts involving market timing. The Alger funds, which admitted to improper trading, also saw $93 million flee, and Morgan Stanley’s retail funds lost $283 million.
Not all funds touched by scandal saw assets leave. Bank of America had $30 million in new money in stock funds. Investors put an estimated $156 million into Bank One stock funds.
Also on Wednesday, Bank One said its mutual fund chief and another executive resigned in the wake of allegations that it allowed improper trading. The bank apologized and promised to reimburse any losses to fund investors.
