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Oldest Fund Faces 200M In Penalties

Jan 27, 2004 | Bloomberg News

Massachusetts Financial Services, manager of the oldest U.S. mutual fund, may pay as much as $200 million and cut fees to settle charges of improper trading in its funds, people familiar with the matter said.

The penalties would be the second largest extracted by state and federal regulators in the trading probe of more than 20 companies in the $7.2 trillion industry.

Terms of the settlement are under discussion and an agreement with MFS may be announced as soon as next week, said the people. MFS spokesman John Reilly declined to comment.

MFS said the SEC has been investigating allegations the company's fund prospectuses contained false and misleading information about its policies on short-term trading. Regulators have accused more than 10 companies including Alliance Capital Management and Putnam Investments of improper trading.

"It's so sad to see some of the industry's most venerable organizations, like MFS, to have seemingly lost their way," said Geoff Bobroff, an industry consultant who formerly worked as a lawyer at the SEC.

State attorney general Eliot Spitzer and regulators in Massachusetts and New Hampshire, as well as the SEC, are focusing on frequent trading, known as market timing, by investors in MFS funds, which total some $140 billion in investments. Regulators say the trading dilutes returns for long-term shareholders.

Market timers seek to profit from the fact that mutual funds are valued once a day at 4 p.m. New York time while the securities they own trade more frequently around the world. Market timing involves buying a fund's shares and then quickly selling them.

In the biggest settlement so far in the industrywide probe, Alliance Capital agreed on Dec. 18 to cut its fees by about $350 million over five years, plus pay a $250 million penalty. A portion of the Alliance settlement has been earmarked to be returned to shareholders.

New Hampshire regulators, who approached Massachusetts officials to assist in their probe of Boston-based money managers including MFS, are in talks with MFS and a settlement may be reached next week, said Scott Kirby, a spokesman for the New Hampshire Bureau of Securities Regulation.

"It's fair to say the ball is in their court." said Juanita Scarlett, a spokeswoman for Spitzer. SEC spokesman John Nester declined to comment.

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