Dec. 4–Alliance Capital Management will keep its contract to manage Rhode Island’s state-sponsored college-savings plan despite being implicated in the scandal rocking the mutual-fund industry.
The State Investment Commission yesterday voiced its concerns to Alliance executives, but took no action to terminate Alliance’s management of the Rhode Island CollegeBoundfund.
“Alliance is committed as a firm to regaining the trust and confidence of all Rhode Islanders,” said state Treasurer Paul J. Tavares, chairman of the investment panel.
A newly appointed senior executive with the company acknowledged market timing had occurred at Alliance, but promised swift action had been taken to keep it from happening again.
“There was wrongdoing at Alliance Capital, and this is unacceptable to us,” declared Marc O. Mayer, the head of Alliance’s mutual-fund business.
Market timing is quick in-and-out trading that attempts to gain quick profits. Though not illegal, it drives up expenses and cut returns for long-term shareholders.
A New York-based money-management company, Alliance has managed Rhode Island’s college-savings plan for three years. The so-called 529 plan allows investors to save for college education in a tax-sheltered account featuring an array of Alliance mutual funds.
Alliance has built the CollegeBoundfund into the nation’s second-largest 529 plan through aggressive marketing to independent brokers who receive a commission for selling it to clients.
The Rhode Island plans holds about $4 billion in assets, with $3.9 billion of that coming from non-Rhode Island investors.
Despite the negative publicity that has surrounded Alliance, the CollegeBoundfund has continued to attract new investors, according to the company.
Last month, the fund had a net gain of 4,440 new accounts.
There was a “modest increase” in transfers to other state’s college-savings plans in November, but new money has exceeded withdrawals, said Richad Davies, another Alliance executive.
Just 37 of 11,200 Rhode Island account holders moved their funds last month, Davies said.
There also was an increase in telephone calls from Rhode Islanders to Alliance in late November, Davies said. He attributed that to publicity in Rhode Island linking the CollegeBoundfund to the market timing scandal, as well as to an unrelated marketing campaign by the company.
New York Attorney General Eliot Spitzer began scrutinizing Alliance Capital in late summer as he launched a widespread investigation of mutual-fund trading practices that has targeted a number of firms.
The Securities and Exchange Commission later joined the probe, and the company launched an internal investigation that is being led by a committee of independent company directors.
The investigations, Mayer said, uncovered market timing within one Alliance fund, the AllianceBernstein Technology Fund, one of the investment options in the CollegeBoundfund.
The fund’s manager, Gerald Malone, was suspended and then later dismissed. Also dismissed was an Alliance hedge fund sales executive.
The company also forced the resignations of its president, John D. Carifa, and Mayer’s predecessor as head of the mutual-fund unit, Michael J. Laughlin.
“We took swift and severe action,” Mayer said.
Similar actions will be taken if further wrongdoing is found, he said.
The company is cooperating with the SEC and Spitzer investigations and expects to face sanctions and penalties, Mayer indicated.
He said there is no evidence Alliance portfolio managers engaged in market timing for their own accounts or allowed late trading after the daily 4 p.m. cutoff, as occurred at other fund companies.
It is likely late trading took place in some Alliance funds by investors without the company’s knowledge through brokers or other intermediaries, Mayer said.
Last week, the company sent a letter to CollegeBoundfund participants pledging to reimburse them for any losses associated with the market timing that took place.
But Mayer provided no detail yesterday on how much investors would receive or when the compensation will be paid. The company has set aside $190 million to cover costs stemming from the investigations, including compensation to investors.
Tavares recommended to the investment commission that it stick with Alliance, but indicated he will be monitoring the company’s actions closely and could change course if there are new disclosures of questionable activity.
The State Investment Commission will review the Alliance contract monthly. If the panel is dissatisfied with the company’s actions, Tavares said, it could decide not to renew Alliance’s contract when it expires in 2005.
Tavares’s decision to stand by Alliance for now contrasts with the investment panel’s firing of Putnam Investments as a manager of state pension funds.
Tavares drew distinctions between the Alliance and Putnam situations. He noted that Putnam was managing an international stocks portfolio for the Rhode Island pension fund, and the head of Putnam’s international investing team had been fired following the disclosure of market timing activities by Putnam portfolio managers.
Investment commission member James E. Thorsen pointed out Putnam officials had sworn to the panel in late October that market timing allegations against the firm were false. Then just a couple of days later, it was disclosed the company was aware portfolio managers had market timed for their own accounts.
Thorsen quizzed Mayer on whether there would be similar surprise disclosures about Alliance.
Mayer responded that the company has disclosed all wrongdoing it has found, but indicated he could not guarantee that further problems would not be uncovered.
“If anything is found, anything, we will act very aggressively on it, and any investor who has been harmed by the inappropriate activity will be fully compensated,” Mayer said.
He said the company is reviewing its internal controls and procedures to ensure market timing does not reoccur.
“All shareholders must be treated equally in our funds,” Mayer said.
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(c) 2003, Providence Journal, R.I. Distributed by Knight Ridder/Tribune Business News.
