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Mutual Fund Probe Spreads

Massachusetts Financial Services Expects Charges

Dec 9, 2003 | Washington Post The owners of the nation's oldest mutual fund company, Massachusetts Financial Services Co., said yesterday that they expect the firm to be charged with fraud by the Securities and Exchange Commission for allegedly lying to investors about widespread short-term trading in MFS mutual funds.

Sun Life Financial Inc., the Toronto financial services giant that owns Boston-based MFS, said in a statement that SEC investigators have accused the firm of falsely telling investors that it did not allow market timing, a short-term trading strategy that siphons profits from other investors. Massachusetts Secretary of the Commonwealth William F. Galvin is also investigating MFS over the same allegations, officials said.

Neither agency expects to bring charges immediately, sources who have been briefed on the investigations said.

Timing is a strategy that uses frequent trades to make money when mutual fund share prices lag behind the value of underlying assets. Most fund companies, including MFS, say they try to discourage market timing because it leads to higher costs and cuts into returns, but in the past three months, a dozen companies have disclosed that they allowed either insiders or big clients to employ the practice.

Now the SEC staff is alleging that what MFS said in certain "fund prospectuses concerning market timing was false and misleading, and breach of fiduciary duty," Sun Life said.

For example, the MFS Emerging Growth Fund, like many of the company's funds, said in a prospectus dated April 1: "The MFS funds do not permit market timing or other excessive trading practices that may harm fund performance."

But Justin F. Ficken told Massachusetts regulators in a deposition about "a document [in which] MFS states, 'These funds are free to be market timed.' " Emerging Growth was among those listed, said Ficken, one of several Prudential Securities brokers charged with civil fraud by both Galvin's office and the SEC on Nov. 4.

MFS, which has $175 billion in assets under management, said in a statement yesterday that firm officials did not monitor daily trading in 11 large stock and bond funds because they "concluded that frequent trading in these funds would not be disruptive to portfolio management and harm fund performance." MFS has begun monitoring those funds, the firm said. There is no evidence that MFS insiders were timing, Sun Life said.

Some legal experts said an SEC case against MFS could be difficult to make. The prospectus statements "are ambiguous. How do you know [the timing] hurt performance?" said University of Mississippi law professor Mercer E. Bullard.

Also yesterday, four large pension funds said they would use a new SEC rule to try to nominate and elect outside directors to the board of Marsh & McLennan Cos., whose mutual fund subsidiary, Putnam Investments, has lost more than $30 billion in assets since being charged by the SEC with allowing portfolio managers to time their own funds. Putnam also has canceled its contract to run a boilermakers union retirement plan, two months after frequent trading by union members prompted Galvin to file fraud charges.

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