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Funds Company Faces $250 Million Penalty

Spitzer, SEC negotiating with Alliance on abuses

Dec 16, 2003 | Bloomberg News

Alliance Capital Management Holding LP may pay $250 million to settle mutual fund trading abuse allegations, the highest penalty levied against a U.S. money manager by regulators, people familiar with the situation said yesterday.

Alliance, which has said it favored some clients by allowing them to trade mutual fund shares more often than other customers, also may agree to cut the fees it charges as part of a settlement with New York Attorney General Eliot Spitzer, said the people, who declined to be identified.

The sanction and fee cut, under negotiations with the Securities and Exchange Commission and Spitzer, would mark the biggest price yet extracted by regulators in their investigation of illegal trading in the $7.1 trillion fund industry.

A settlement also would highlight the different approaches between the SEC and Spitzer, who has said he wants to lower "inflated" fund fees.

"This has got to be the largest settlement in the history of the fund industry," said Geoff Bobroff, an independent industry consultant in East Greenwich, R.I., and a former SEC enforcement attorney. "It sets a pattern for the rest of the industry to follow."

New York-based Alliance, controlled by France's AXA SA, would be the first fund company to be fined by regulators since Spitzer announced the investigation of trading abuses on Sept. 3.

While both sides have agreed to the size of the fine, other terms of the settlement, such as the size of the reduction in fees charged by Alliance, are still being discussed, the people said.

The financial penalty will be used to compensate investors who lost money because of trading arrangements that Alliance made, the people said. The company has said it set aside $190 million in the third quarter to cover possible penalties and litigation.

The sanction would equal 1 1/2 times what Alliance earned during all of last year and 10 percent of the company's market value.

Regulators are examining improper trading at 22 other companies including Putnam Investments, Strong Capital Management Inc. and Invesco Funds Group.

John Meyers, an Alliance spokesman, declined to comment. Shares of Alliance fell 15 cents to $32.05 in New York Stock Exchange composite trading. The stock has declined 10 percent since Sept. 30, when the company said it was being investigated.

Herb Perone, an SEC spokesman, didn't return a call for comment. Spitzer is in settlement discussions with Alliance in collaboration with the SEC, said Darren Dopp, a spokesman in Spitzer's office. He declined further comment.

Spitzer is seeking to reduce fees through his probe of trading abuses. He has said Pilgrim Baxter & Associates Ltd. in Wayne, Pa., should pay back as much as $250 million and Denver-based Invesco should return an unspecified amount.

By contrast, SEC Chairman William H. Donaldson has said fees shouldn't be linked to settlements for illegal trading. He favors better disclosure of costs to allow investors to make informed choices.

Alliance charges among the highest stock-fund fees in the industry, averaging about $20 per $1,000 invested, according to data compiled by Bloomberg. Vanguard Group's annual fees are about $2.55. The average is $14, Bloomberg data show.


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