Alliance Capital Receives Wells NoticeNov 6, 2003 | AP Alliance Capital confirmed Thursday that federal regulators intend to take civil action against the money management firm's mutual fund operations the same operations New York state regulators are expected to charge next week over improper fund trading.
In a news release, Alliance Capital said it had received a Wells notice from the Securities and Exchange Commission (news - web sites) informing it that the commission's staff will recommend that an enforcement action be brought against the firm for market-timing, a type of quick, in-and-out trading, that capitalizes on loopholes in the way fund shares are priced.
The company also said it is hopeful it can reach a settlement with the SEC and state of New York that would likely include "sanctions and penalties and appropriate restitution to mutual fund shareholders."
Market-timing is not illegal but barred by many funds because it increases expenses and reduces long-term shareholders' returns. Regulators have said funds that allowed some clients to market-time despite policies against the practice committed fraud.
New York-based Alliance Capital has acknowledged that market-timing occurred in some of its funds and "had an adverse effect on mutual fund shareholders." In September it suspended two employees for their involvement, including a portfolio manager of the AllianceBernstein Technology Fund.
An SEC spokesman declined to comment on Alliance Capital, as did a spokeswoman for New York attorney general Eliot Spitzer.
But a source familiar with the New York probe said a complaint against Alliance Capital will likely be filed next week. The source, who spoke on condition of anonymity, also said that investigators have determined that the alleged wrongdoing at Alliance Capital occurred with the approval of top executives, and was not confined to the two individuals as the company has suggested.
The source also said it is likely criminal charges will be filed next week against Richard Strong, the founder of the Strong mutual fund family, as well as separate charges against Strong's company, for alleged market-timing transactions. The company has admitted that Strong engaged in some next-day transactions in personal accounts, as well as those of friends and family. Those transactions are estimated to have yielded as much as $600,000.
A lawyer for Richard Strong declined to comment on the possibility of charges, as did a spokeswoman for his company. A message seeking comment from Alliance Capital was not immediately returned.
Any cases brought against Alliance Capital or Strong would be the latest developments in the rapidly expanding investigation of improper trading across the $7 trillion mutual fund industry. So far, 11 individuals have been accused of fund trading-related wrongdoing; three have pleaded guilty.
In September, Canary Capital LLC agreed to pay $40 million in September to settle Spitzer's charges that the hedge fund had engaged in market-timing and illegal late-trading of mutual funds.
Putnam Investments and employees at Prudential Securities have also been accused of fund-related wrongdoing by the state of Massachusetts and the SEC. Spitzer's office is now working on a case against Invesco Funds, which could result in charges by Thanksgiving, the source said.
Other companies under investigation include Janus, Bank One and Bank of America — all of whom were mentioned in the Spitzer complaint against Canary. Dozens of other companies have also been subpoenaed, including Fidelity Investments, Morgan Stanley and Deutsche Bank.
Although there have been rumors of settlements, there appear to be no imminent deals. Spitzer has said any out-of-court agreements would have to include full payback of the hefty fees that fund companies received for managing mutual funds while they allowed fund trading abuses to occur so far, most funds have only offered to reimburse shareholders for the actual losses caused by improper trading.
Also Thursday, House lawmakers in Washington moved toward drafting and adopting legislation that would stiffen penalties for fraud in mutual fund operations and require fund companies to disclose more information to investors.
"The mutual fund industry has a lot of work to do to restore confidence in their credibility," Mary Schapiro, vice chairman of the National Association of Securities Dealers, testified at Thursday's House hearing.