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Janus Details Fund Trading Abuses

Sep 30, 2003 | www.cbsmarketwatch.com

Janus Capital Group, one of several prominent fund companies at the center of a growing mutual fund industry trading scandal, said Tuesday that special relationships with market-timing investors netted the Denver fund giant about $1 million in management fees.

Janus added an ongoing internal investigation indicates that employees "central to these decisions" are no longer employed by the firm.

"However, if our internal review concludes that any current Janus employee did not act in good faith or knowingly disregarded the best interests of fund shareholders, we will take appropriate action," Janus CEO Mark Whiston said in prepared remarks to fund shareholders published in the funds' quarterly statements and on the company Web site.

"We believe there were a total of 12 discretionary arrangements in Janus' U.S.-based mutual fund business and all of these have been terminated," Whiston added. But only four of these relationships engaged in frequent trading, he added. See Janus struggles to regain trust

"This is not intended to excuse what happened," Whiston said. "But it does reflect the limited scope of Janus' involvement in this type of discretionary arrangement."

Trading abuses affected five retail funds, Whiston noted. They include: Janus Mercury, Janus Worldwide, Janus Enterprise, Janus High-Yield and Janus Overseas.

Also, two funds sold through financial advisers were named: Janus Adviser Worldwide and Janus Adviser International Growth.

Frequent trading, also known as "market timing" trading based on expectations of very-short-term gains is a focus of federal and state regulators as they delve deeper into allegations that several fund companies made sweetheart deals with hedge funds that enriched themselves at the expense of fund shareholders.

It's fund shareholders who take a hit when market timers redeem shares and take profits. Fund managers must either sell stock or use cash to meet the redemption, leaving remaining shareholders stuck with the bill for capital gains and trading costs.

Janus spokesperson Shelley Peterson declined to name the dozen investors that had special arrangements with the firm. She did note that the firm's investigation does not implicate any current Janus portfolio managers.

"Based on our internal review to date, we believe that the current portfolio managers of the affected funds did not approve the frequent trading arrangements associated with their respective funds." Peterson said. "They were not aware of any discretionary timing agreements."

The total managed assets involved in these arrangements amounted to almost $380 million, or 0.25 percent of the company's roughly $150 billion under management.

Janus reiterated that it would reimburse all management fees it earned from these discretionary arrangements to shareholders of the affected funds.

The company said the funds' independent trustees have hired auditing firm Ernst & Young to work with Janus' management team to develop and implement procedures to thwart frequent trading.

The reports of abuses stem from disclosures in early September by New York state Attorney General Eliot Spitzer accusing four prominent fund companies of unethical and, in one case, illegal trading arrangements with a favored customer.

Spitzer cited Bank of America's Nations Funds in a so-called late-trading scheme allowing hedge fund Canary Capital Partners to buy funds after the stock market's 4 p.m. closing time and still receive that day's price, in violation of securities laws. Bank of America has since fired several implicated employees, and prosecutors have indicted one former executive on felony charges.

Separately, Spitzer named Nations Funds, Janus, Bank One's One Group and privately held Strong Financial in a deal permitting Canary to make "market-timing" trades in their funds, even though the funds' legal prospectuses assured shareholders that such trading was disavowed.


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