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Invesco Hit With Civil Fraud Charges

Dec 3, 2003 | USA TODAY

The mutual fund industry took another hit Tuesday as regulators accused Invesco Funds Group and its chief executive of civil fraud.

The Securities and Exchange Commission and New York Attorney General Eliot Spitzer separately filed charges that accuse the Denver-based firm and CEO Raymond Cunningham of orchestrating a scheme to allow favored investors to market time funds to boost management fees.

Colorado Attorney General Ken Salazar also filed a lawsuit Tuesday against Invesco, accusing it of violating the state's Consumer Protection Act.

Since the mutual fund scandal ignited three months ago, many firms and employees have been implicated in trading irregularities. But only a few top executives have been charged.

Last week, Spitzer filed criminal charges against Grant Seeger, former CEO of Security Trust Co., which processes mutual fund trades for retirement plans. Last month, regulators accused the co-founders of Pilgrim Baxter & Associates, Gary Pilgrim and Harold Baxter, of civil fraud. And James Connelly Jr., former vice chairman of Fred Alger, pleaded guilty in October to tampering with evidence.

In charging Invesco, the SEC said the firm made secret exceptions to its market-timing policy for certain select large traders. These arrangements, called Special Situations, were not disclosed to investors or the independent members of the boards of the funds, the SEC said.

Market timing involves rapid trading, often in international funds, to profit from time zone differences at the expense of long-term investors. It is not illegal, but it might violate company rules.

Invesco's parent company, Amvescap (AVZ), said in a statement Tuesday that it will vigorously contest the charges. Invesco "never put its financial interest ahead of the best interests of the funds' shareholders," the company said.

The case stems from Spitzer's investigation into Canary Capital Partners, a hedge fund. In early September, he settled charges with Canary that it engaged in illegal trading practices with several mutual fund companies.

Canary was one of the investors that was admitted into Invesco's Special Situations program, according to the complaint filed Tuesday by Spitzer's office. Though Invesco's prospectus limited investors to four exchanges out of a fund a year, Canary made 141 exchanges in the Invesco Dynamics fund in two years, the filing says.

Using a hedging strategy to profit from the fund's losses, Canary made about $50 million, or a return of 110%. During the same period, buy-and-hold investors in the fund lost 34%, the complaint says.

"According to the charges, the market timing was apparently fairly widespread and involved large amounts, so it makes Invesco's claims that they were acting in investors' interest hard to buy," says Russ Kinnel, chief analyst at fund researcher Morningstar.


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