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MFS Agrees To $225 Mln SEC Settlement

Feb 5, 2004 | www.cbsmarketwatch.com

MFS Investment Management agreed Thursday to pay $225 million and suspend two top executives in resolving federal and state regulators' allegations that the mutual-fund giant permitted trading abuses in its funds.

The anticipated settlement, reached jointly with the Securities and Exchange Commission and New York and New Hampshire regulators, imposes one of the harshest financial penalties regulators have extracted so far from companies implicated in the unfolding fund industry scandal.

Boston-based MFS, a unit of Canadian insurer Sun Life Financial will pay $225 million, including a $50 million penalty, to compensate shareholders in funds where improper trades occurred.

In addition, MFS chief executive John Ballen and chief investment officer Kevin Park have been barred for three years from serving as an officer or director of any company in the fund industry, and each will pay $315,000, including a $250,000 fine, Cutler said.

Ballen also was slapped with a nine-month suspension from the fund business in any capacity, and Park, a six-month suspension, for failing to uncover or identify the improper trades.

"This is still another case of a mutual fund company failing to put the interests of their clients first," Stephen Cutler, SEC enforcement director, told reporters.

MFS also agreed to reduce fund fees by $25 million a year, or $125 million, for the next five years, as part of a separate arrangement with New York Attorney General Eliot Spitzer.

Regulators say MFS allowed privileged investors to conduct frequent trading in 11 funds.

Some of the trading abuses in MFS funds apparently involve illegal late trading activity, Peter Bresnan, acting district administrator in the SEC's Boston office, said in a telephone interview.

"Our investigation of those late traders is continuing," Bresnan said. "We know who they are; we're going to find them, and they'll be punished."

Buying or selling funds after the U.S. stock market's 4 p.m. eastern closing time violates federal securities laws.

Neither the SEC nor the state complaints alleged that that any MFS employees engaged in or knew about late trading.

Market timing, in contrast, isn't necessarily illegal, but can hurt long-term fund shareholders. The rapid buying and selling can be fraudulent if a fund company prohibits the practice but allows selected customers and employees to engage in it.

"This settlement levels the playing field for all investors in this mutual fund company," Spitzer said in a written statement. "From now on, market timers will no longer be permitted to profit at the expense of long-term investors," he added.

MFS also is required to restructure its board so that 75 percent of fund directors are independent, including an independent chairman.

The company promised to hire a compliance officer and an independent consultant to review whether the firm has properly implemented the governance terms of the settlement.

MFS Chairman Jeffrey Shames said in a prepared statement, "While there will still be many challenges ahead, the entire company is focused on shoring up the trust that fund investors and clients have long placed in MFS and delivering on the high standards that all of our constituencies expect of the company."


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