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FleetBoston Unit Allowed Improper Fund Trades

Feb 13, 2004 | Wall Street Journal

Mutual-fund employees at a unit of FleetBoston Financial Corp. improperly allowed "market-timers" to conduct rapid-fire trades in three funds including one targeted at children the company and people familiar with the trading told The Wall Street Journal.

Rapid trading in the $855 million Columbia Young Investor Fund could prove especially embarrassing for Fleet because the revelation means employees in its sales arm allowed the fast-moving investors to skim profits from kids. The fund, founded by Fleet's Stein Roe unit and formerly sold under that name, focuses on stocks that "meet the needs of young consumers" and has its own child-centered Web site, younginvestor.com, to help teach kids the value of starting to invest at a young age.

Yesterday, Boston-based Fleet also acknowledged that its Columbia Funds unit and predecessor Liberty allowed trading in the $371 million Newport Tiger Fund and the $855 million Stein Roe Growth Stock Fund, now called Columbia Growth Stock Fund. Fleet also said that it would reimburse investors for losses caused by market-timing activity.

Asian stock funds, such as Newport Tiger, and other international funds are generally considered to be especially vulnerable to harm from market timers, who take advantage of time-zone differences and buy and sell fund shares at outdated prices. But the current scandal-related investigations into share trading have found few instances where fund officials allowed their foreign-stock funds to be used for market-timing because of the outsized opportunity to skim profits. As a result, the discovery of market-timing in the Newport Tiger fund is one of the few instances where improper trading has been found in such a portfolio of overseas stocks.

At the same time, Columbia Funds accepted so-called sticky assets, according to people familiar with the matter. In sticky-asset deals, market-timers put money in other investment vehicles run by the firm in order to help gain access to certain mutual funds for market-timing.

Regulators have said that they consider sticky-asset arrangements to be among the more serious infractions they have uncovered. These arrangements, regulators have said, suggest a clear intention by a fund company to profit off an arrangement that was harming long-term mutual-fund shareholders.

Fleet spokesman Charles Salmans said the company had taken steps to deter market-timing a year ago, including adding 2% redemption fees to certain international-fund shares sold within 60 days of purchase.

Market-timing of mutual funds generally refers to rapid-fire buying of fund shares in order to take advantage of discrepancies between imprecise or out-of- date valuations on a fund's underlying holdings and the fund's overall fund share price. Market-timers hurt long-term investors primarily by reducing the profits of buy-and-hold shareholders. Market-timing isn't necessarily illegal, but the SEC and state regulators have brought civil fraud charges against mutual-fund companies for allowing the short-term trading when the language in a fund's prospectus suggested such trading wasn't permitted.


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