SCANDAL SUMMARY
Many companies have lost employees over market timing
Sunday, November 23, 2003
Many mutual fund companies find themselves caught in New York Attorney General Eliot Spitzer’s widening net. Many more firms than are on this list have been subpoenaed.
Here are those where there is public suggestion of improper behavior. Most of the firms say they are cooperating with regulators and will make restitution to investors.
Alliance Capital Management: Internal investigation showed several big investors were allowed to market time in a mutual fund. Two senior executives have been ousted and two other workers who were previously suspended have left the firm.
American Express: Accused of failing to pass volume discounts to large mutual fund clients, company may face sanctions from regulators.
Bank of America (Nations Funds): Allegedly allowed a New Jersey hedge fund, Canary Capital Partners LLC, to late trade and market time; has fired several fund unit executives.
Bank One: Allegedly allowed Canary Capital to market time its One Group funds in exchange for fees from other Canary investments. The head of in-house funds has left the firm.
Charles Schwab: Said it found instances where some parties were allowed to market time in its U.S. Trust unit’s Excelsior Funds. Company is continuing to investigate, looking for the limited number of instances at U.S. Trust where late trading may have occurred.
Federated Investors: Internal investigation prompted by subpoenas by regulators showed firm allowed late trading and market timing.
Fred Alger Management: An internal review indicated a hedge fund client was late trading and market timing. James Connelly Jr., one of three suspended employees, settled civil charges with the SEC for permitting market timing and obstructing the investigation.
Janus Capital: Some of its executives allegedly sold Canary Capital the right to do late trading and market timing; it is conducting an internal review.
Legg Mason: Accused of failing to pass volume discounts to large mutual fund clients, company may face sanctions from regulators.
Loomis Sayles & Co.: Said it found two instances where it accepted investments from frequent traders; it said it has stopped dealing with the traders.
Morgan Stanley: Settled with the SEC and NASD and agreed to pay $50 million amid allegations it recommended inappropriate share classes, such as “B” shares, to clients.
Pilgrim Baxter & Associates: The SEC and Spitzer have filed complaints accusing Gary L. Pilgrim and Harold J. Baxter, founders of PBHG mutual funds, of fraud because they allegedly allowed two investors to trade billions of dollars in and out of their funds even as they discouraged others from such trading and acknowledged that it caused harm. The trading generated millions in profits for those investors and the two founders at the expense of the funds’ shareholder, officials said. Pilgrim and Baxter stepped down before the complaint was filed.
Prudential/Wachovia: A group of former Prudential stockbrokers and managers resigned over suspicions they were market timing in mutual funds. Massachusetts regulators and the SEC filed civil charges against individuals and the NASD is investigating for possible late trading. Wachovia may also face sanctions from regulators for allegedly failing to pass volume discounts to large mutual fund clients.
Putnam Investments: Massachusetts regulators and the SEC charged the firm with securities fraud, making it the first firm to be charged in the scandal. Putnam agreed to a partial settlement with the SEC, saying it would make significant reforms and establish a process for repaying investors harmed by excessive market timing. Massachusetts’ securities regulators are continuing their case against the firm. CEO Lawrence Lasser has resigned, and two managers have been charged with civil fraud.
Strong Capital Management: Allegedly allowed Canary Capital to market time its One Group funds in exchange for fees from other Canary investments. Subsequent leaks from Spitzer’s office have accused founder and Chairman Richard S. Strong of making trades in certain Strong funds to the detriment of shareholders. Strong stepped down as chairman of the mutual fund board, but he remains chairman of the corporation. The company and the fund board are conducting internal investigations.
Source: Arcataur Capital Management Inc., Milwaukee; Bloomberg Business News; Milwaukee Journal Sentinel archives
