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Market Timing Double Blow For Alliance Capital

Fund manager fined US$250M, fees cut by 20%

Dec 19, 2003 | National Post

Alliance Capital, one of the biggest fund managers in the United States, will pay US$250-million in fines and lower its fees by 20% to settle charges by the U.S. Securities and Exchange Commission and Eliot Spitzer, New York attorney-general, that the group defrauded its mutual fund investors by allowing market timing in its funds.

The sum is the biggest paid yet in the trading scandal that has enveloped the US$7-trillion mutual fund industry, and the biggest by any mutual fund company. Another 22 companies are under investigation. Several are in settlement talks that could have a similar outcome.

Alliance has struck different settlements with the SEC and Mr. Spitzer's office because the regulators could not agree on whether fees should be included.

The SEC said it would distribute the US$250-million fine to the shareholders who were harmed by Alliance's actions. It said Alliance had entered into arrangements that permitted market timing of its funds in exchange for a certain amount of assets, which harmed the returns of long-term investors.

The SEC said its members had unanimously determined that it would not force Alliance to lower its fees because the allegations were about market timing, not fees. There was no evidence that Alliance fees were illegally high, and the decision about how much to pay should be left to consumers rather than regulators, it said.

However, Mr. Spitzer has repeatedly said that fees were at the centre of the scandal, which was about corporate governance. He forced Alliance to lower its fees by 20% as part of his settlement.

Alliance, which is controlled by Axa of France, has seen a 10% drop in its shares since the news first broke that it was being investigated.

The group had already set aside US$190-million to cover the costs of the investigation.

Earlier this week, the first fund executive was sentenced to a prison term. James Connelly, a former vice-chairman of Fred Alger, was sentenced to between one and three years for concealing evidence of improper trading.

However, the damage appears to have been limited to those funds that have been named in the scandal, rather than affecting the whole industry.


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