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Spitzer Releases Details of Alliance Capital Settlement

Dec 19, 2003 | Albany Business Review, State Attorney General Eliot Spitzer released details of a $600 million settlement with Alliance Capital Management to resolve an investigation into the mutual fund's trading practices.

Alliance will reduce its mutual fund fees by 20 percent and freeze the fees for five years. This will cost the company $70 million a year, according to Spitzer's office.

Alliance will also establish a $250 million fund to compensate shareholders for the adverse effects of market timing in some of its mutual funds. Of that amount, $100 million is a penalty payment, and $150 million is for disgorgement, meaning the company must give back what it gained from the practice.

"This settlement will fundamentally alter the way this company is run," Spitzer said in a written statement. "Instead of favoring managers, the company will now focus on the interests of investors by eliminating harmful market timing and reducing fees for all shareholders."

Alliance CEO Lewis A. Sanders said the deal was important to the company and its investors.

"These settlement agreements are an extremely important step and an important point of departure. The key provisions of these agreements, which we endorse strongly, will bring large and lasting benefits to our clients, strengthen the governance and thus the integrity of our mutual fund services, and codify our commitment to best industry practices in many areas," he said in a written statement.

Spitzer praised the Securities and Exchange Commission for coordinating settlement negotiations with New York City-based Alliance. A joint investigation by the attorney general and the SEC concluded that Alliance executives had authorized complex timing arrangements with 18 broker dealers and hedge fund operators in return for infusions of assets that generated management fees.

Publicly, though, the company had discouraged the practice.

"Improper trading and exorbitant fees are both consequences of a governance structure that permits managers to enrich themselves at the expense of investors," Spitzer said. "This coordinated resolution with the SEC addresses both concerns in a way that drives appropriate compensation back to investors and implements market-based reforms to protect them in the future."

Under the settlement, Alliance is required to hire a full-time officer to ensure that fees charged by the funds are reasonable. That official will ensure that fees charged to retail investors are reasonable.

According to Alliance, the company does not anticipate payment of a distribution in the fourth quarter because of the need to establish a restitution fund.

Alliance expects to take a $140 million pre-tax charge to forth quarter earnings, according to the company's Web site.

"As a result of this charge, together with the charge taken in the third quarter, Alliance and Alliance Holding do not anticipate payment of a distribution to their respective Unit holders for the fourth quarter," according to an Alliance release.

Distributions are expected to resume for the first quarter of 2004, with payout policy returning to traditional levels for the second quarter of 2004.

"While the management fee reduction is an integral part of the agreement with the New York attorney general, we embrace it fully. Driving costs out of our mutual fund operations and passing on the resulting savings in the form of lower fees and expenses to our mutual fund shareholders is a major company priority," Sander's statement said. "The establishment of the $250 million fund delivers on our public commitment that any client adversely affected by inappropriate market timing in our mutual funds will receive compensation."

Under its agreements with the SEC and Spitzer, Alliance Capital's Mutual Funds Boards, will also have independent directors that comprise at least 75 percent of each board. The boards will add a senior officer and other needed staff to help ensure compliance and avoid conflicts of interest.

While Spitzer's office and the SEC agreed on the need to force the company to disgorge its profits and pay restitution, the two parted ways on the need for Alliance to reduce its fees.

The commission determined that fee relief "would not serve our law enforcement objectives in this case," a statement from the SEC said.

"There were no allegations that Alliance Capital's mutual fund fees were illegally high," the statement said. "This is a case about illegal market timing, not fees. Therefore we see no legitimate basis for the commission to act as a 'rate-setter' and determine how much mutual fund customers should pay."

Spitzer, though, argued that the $250 million in penalties sought by the SEC didn't go far enough.

Alliance collected management fees from fund shareholders while it simultaneously undercut them by permitting illegal market timing, he said.

"The desire for increased fees led managers and directors to abandon their duty to investors and to condone improper and illegal activity," he said.

"The SEC settlement with Alliance sells investors short because it does not provide any compensation to investors for that harm. A $250 million settlement, which is all the SEC negotiated for, is simply inadequate to

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