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Alliance Capital Ousts Two Top Execs

Oct 10, 2003 | AP

Two top executives at Alliance Capital Management were ousted Monday and the investment management company warned of a "high likelihood" that it will face sanctions and penalties for improper trading of mutual funds.

The company requested the resignations of John D. Carifa as president, chief operating officer and director of Alliance Capital and chairman of the board of its mutual funds, and of Michael J. Laughlin as chairman of Alliance Capital's mutual fund distribution unit.

"They had both senior and direct responsibility over the firm's mutual fund unit which, as previously reported, allowed inappropriate market timing transactions, some of which had an adverse impact on mutual fund shareholders," said Lewis A. Sanders, Alliance Capital's chief executive.

Market timing is the use of quick, in-and-out trades that skim profits from longer-term shareholders. The practice is not illegal but most funds do not allow it. Regulators have indicated that funds that officially prohibit the practice but make selective exceptions are committing fraud.

Alliance Capital is one of the nation's largest money managers, with $427 billion in assets under management according to the most recent figures available, primarily for pension funds and other institutional customers. The firm also offers mutual funds, many under the AllianceBernstein brand, and owns money manager and research firm Sanford C. Bernstein.

The company is the latest to come under scrutiny in the scandal that is rapidly spreading across the $7 trillion mutual fund industry. Hundreds of subpoenas have been issued by federal, state and industry regulators, with civil charges filed against Putnam Investments and employees at Prudential Securities. Individual employees at Bank of America, Millennium Partners and Fred Alger & Co. also have been charged by the state of New York, with two guilty pleas so far.

Putnam Investments, which has lost about $14 billion in assets under management since before the scandal, took out ads Monday in The Wall Street Journal, The New York Times and other major newspapers promising the company would "lead the mutual fund industry in reform." Putnam's assets under management now stand at about $263 billion, according to regulatory filings, down from $277 billion.

A Putnam spokeswoman declined to comment on the ads or the fund outflows.

Alliance Capital reiterated its awareness of the seriousness of the situation, and said Monday that "there is a high likelihood that Alliance Capital will face sanctions and penalties as the firm works to bring this matter to a close."

Last week, the company disclosed that the Securities and Exchange Commission had notified it that regulators would likely bring civil charges against the company. The state of New York expects to file charges against Alliance Capital this week for allowing improper trades, according to a source familiar with the investigation who spoke on condition of anonymity.

Authorities contend that Alliance Capital executives knew of the market timing arrangements and tolerated the practice at the expense of long-term shareholders, but, until Monday, the company had portrayed the wrongdoing as limited to two less senior employees who had been suspended before Carifa and Laughlin were asked to resign.

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