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Regulators Scrutinize Two More Fund Firms

N.Y., SEC Probing Sales At Alliance, Invesco

Nov 6, 2003 | Washington Post

Two more large mutual fund families are in regulators' sights in the rapidly expanding state and federal probes of improper trading in the $7 trillion industry, sources familiar with the investigations said Wednesday.

New York Attorney General Eliot L. Spitzer, who became the first to move against mutual fund abuses in September, is weighing bringing cases against Alliance Capital Management L.P. and the Invesco Funds, a division of Amvescap PLC, for failing to stop improper short-term trading that cut into returns for long-term investors, the sources said.

The Securities and Exchange Commission also has notified Alliance that the agency's enforcement staff has recommended bringing civil charges against it, one source said, confirming a New York Times report. The SEC and Spitzer have generally brought cases together since Spitzer first began his investigation into mutual fund trading practices known as "late trading" and "market timing."

The investigation of Alliance is much further along than the inquiry into Invesco. The SEC and Spitzer's office could take action as soon as next week against Alliance, according to sources. The Invesco probe is likely to move more slowly, sources said.

An Alliance spokesman declined to comment, but the firm said Sept. 30 that it had suspended a portfolio manager and a hedge-fund executive after an internal review "identified conflicts of interest in connection with certain market timing transactions."

Spokesmen for Amvescap and AIM, the Amvescap unit that distributes Invesco funds, did not return calls and e-mails seeking comment.

Spitzer said in an interview Wednesday that his staff has also opened a new front in its examination of mutual fund abuses probing whether investment banks weighed improper considerations when doling out shares in initial public offerings to mutual funds.

Industry sources said the allegations cut two ways that investment banks either played favorites among mutual funds when doling out shares in hot IPOs or that they improperly stuffed their own mutual funds with IPOs that otherwise would have sold poorly.

"We've heard from too many people that there were allocation issues," Spitzer said. "But we're just beginning."

So far, the SEC, Spitzer and Massachusetts regulators have focused on widespread evidence that fund companies and brokers offered two kinds of special trading opportunities to insiders and hedge funds that cut into profits for the vast majority of the 95 million investors who rely on the industry to save for education and retirement.

One of the practices, late trading, is illegal because it breaks a 1968 law requiring orders placed after 4 p.m. to get the next day's price. The other, market timing, a short-term strategy that tries to exploit the fact that mutual fund prices sometimes lag behind the prices of their underlying holdings, is not against the law. But funds and brokers that allow some investors or insiders and not others to do it may violate securities laws.

Alliance was named but not charged in the very first mutual fund case Spitzer brought Sept. 3. The settled civil complaint against Canary Capital Management LLP, a New Jersey hedge fund, said that the hedge fund had made frequent trades in and out of Alliance funds. Invesco was one of the very first fund managers to receive a subpoena from Spitzer after the scandal became public.

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