Alliance Agrees to $600M SEC SettlementDec 19, 2003 | AP Alliance Capital Management agreed Thursday to a $600 million settlement, including a 20 percent reduction in its fund fees for the next five years, to resolve federal and state accusations it permitted improper trading of its mutual funds.
An agreement jointly negotiated by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer calls for the company to pay $250 million in restitution and take new steps to improve its corporate governance and prevent trading abuses. The payment is the largest ever by a mutual fund adviser, the SEC said.
Separately, Spitzer's settlement also requires Alliance to reduce its fees by 20 percent and freeze them at the lower rate for at least five years a value of $70 million annually for a total of $350 million.
The settlement, which does not require Alliance to admit wrongdoing, is the most costly to date in the industrywide scandal that has ensnared dozens of fund companies including Putnam Investments, Strong Investments and Prudential Securities. It is significant both because of the dollar figure involved and Spitzer's requirement that Alliance lower its fees.
Spitzer had previously said such a reduction would be key to any settlement with his office, and his success in getting Alliance to agree could mean other fund companies accused of wrongdoing, including Pilgrim Baxter & Associates, will have to make similar concessions.
"This settlement will fundamentally alter the way this company is run," Spitzer said in a statement. "Instead of favoring managers, the company will now focus on the interests of investors by eliminating harmful market timing and reducing fees for all shareholders."
The SEC disagreed, however, saying the case was "about illegal market timing, not fees" and any fee reduction was "better left to informed consumers, independent and vigorous mutual fund boards, and the free market."
Alliance had previously acknowledged that shareholders had been hurt by the trading abuses. In a statement Thursday, Alliance chief executive Lewis A. Sanders said the settlement would benefit its investors and "strengthen the governance and thus the integrity of our mutual fund services."
Alliance is one of the nation's largest money managers, with $456 billion in assets under management as of Nov. 30, primarily for pension funds and other institutional customers. The company also manages mutual funds, many under the AllianceBernstein brand, and owns money manager and research firm Sanford C. Bernstein.
Regulators said Thursday that Alliance violated its fiduciary duty to investors by permitting 18 hedge fund operators and broker dealers to engage in market timing of its mutual funds, despite fund policies to the contrary. In return, those clients parked millions of dollars in other Alliance funds.
Market timing is a type of quick, in-and-out trading that is not illegal, but frequently prohibited by funds because it skims profits from long-term shareholders.
According to the SEC order, market timing in mutual funds at Alliance reached over $600 million at its height in 2003, with the knowledge of top executives. The order did not name the executives, but identified one as "the then president and chief operating officer of Alliance Capital, who also served as the chairman and president of the mutual funds at issue here." Last month John D. Carifa resigned from those positions.
The SEC filing also said the company provided confidential information about the portfolio holdings of certain funds to Canary Capital LLC the hedge fund operator that earlier this year agreed to pay $40 million to settle a complaint by Spitzer's office alleging improper trading practices. Additionally, Alliance misled shareholders about a proxy in which the company sought shareholder approval to remove trading restrictions on one fund in order to facilitate market timing.
"Alliance Capital violated the first rule for investment advisers to protect the interests of the client. A violation of this fundamental trust warrants a most severe sanction, and the SEC's order reflects that. The size of the payment he largest ever by a mutual fund adviser also ensures full compensation to investors injured by these timing arrangements," Stephen M. Cutler, director of the SEC Division of Enforcement, said in a statement.
In an interview, Cutler said the investigation of Alliance and other mutual fund companies continues. He declined to say if Carifa or other Alliance executives would be charged.
The settlement announced Thursday had been widely expected as details leaked out earlier in the week while negotiations were being finalized.
Besides ousting Carifa, the company also obtained the resignation of Michael J. Laughlin, the chairman of Alliance Capital's mutual fund distribution unit.