Two top executives at Alliance Capital Management were ousted Monday and the investment management company warned of a “high likelihood” that it will face sanctions and penalties for improper trading of mutual funds.
The company requested the resignations of John D. Carifa as president, chief operating officer and director of Alliance Capital and chairman of the board of its mutual funds, and of Michael J. Laughlin as chairman of Alliance Capital’s mutual fund distribution unit.
“They had both senior and direct responsibility over the firm’s mutual fund unit which, as previously reported, allowed inappropriate market timing transactions, some of which had an adverse impact on mutual fund shareholders,” said Lewis A. Sanders, Alliance Capital’s chief executive.
Market timing is the use of quick, in-and-out trades that skim profits from longer-term shareholders. The practice is not illegal but most funds do not allow it. Regulators have indicated that funds that officially prohibit the practice but make selective exceptions are committing fraud.
Alliance Capital is one of the nation’s largest money managers, with $427 billion in assets under management according to the most recent figures available, primarily for pension funds and other institutional customers. The firm also offers mutual funds, many under the AllianceBernstein brand, and owns money manager and research firm Sanford C. Bernstein.
The company is the latest to come under scrutiny in the scandal that is rapidly spreading across the $7 trillion mutual fund industry. Hundreds of subpoenas have been issued by federal, state and industry regulators, with civil charges filed against Putnam Investments and employees at Prudential Securities. Individual employees at Bank of America, Millennium Partners and Fred Alger & Co. also have been charged by the state of New York, with two guilty pleas so far.
Putnam Investments, which has lost about $14 billion in assets under management since before the scandal, took out ads Monday in The Wall Street Journal, The New York Times and other major newspapers promising the company would “lead the mutual fund industry in reform.” Putnam’s assets under management now stand at about $263 billion, according to regulatory filings, down from $277 billion.
A Putnam spokeswoman declined to comment on the ads or the fund outflows.
Alliance Capital reiterated its awareness of the seriousness of the situation, and said Monday that “there is a high likelihood that Alliance Capital will face sanctions and penalties as the firm works to bring this matter to a close.”
Last week, the company disclosed that the Securities and Exchange Commission had notified it that regulators would likely bring civil charges against the company. The state of New York expects to file charges against Alliance Capital this week for allowing improper trades, according to a source familiar with the investigation who spoke on condition of anonymity.
Authorities contend that Alliance Capital executives knew of the market timing arrangements and tolerated the practice at the expense of long-term shareholders, but, until Monday, the company had portrayed the wrongdoing as limited to two less senior employees who had been suspended before Carifa and Laughlin were asked to resign.
“To let two people of that magnitude go that would give you an indication of Alliance’s own level of concern,” said Phil Edwards, managing director of funds research at Standard & Poor’s. “This is spreading into management.”
Separately, S&P credit analysts reaffirmed Alliance Capital’s credit rating Monday, saying its financial outlook remains stable.
Alliance Capital said Gerald M. Lieberman will become a director of Alliance Capital and the company’s chief operating officer. Marc O. Mayer, currently head of the institutional investment management sales and marketing unit, will assume the leadership of Alliance Capital’s mutual fund business. Both are company veterans.
The company has said it will make full restitution to investors for “the adverse effects that market timing had on the firm’s mutual funds.”
In trading Monday, shares of Alliance Capital’s two biggest owners slipped on the New York Stock Exchange. Alliance Capital Holding fell 85 cents, or 2.7 percent, to $30.90, while AXA dropped 12 cents to $18.94.
The National Association of Securities Dealers, meanwhile, is investigating whether two dozen brokers at investment giant J.P. Morgan Chase improperly sold mutual fund shares to generate higher commissions, a person familiar with the matter said. The probe is part of a broad investigation by the brokerage industry’s self-policing organization, the person said, speaking on condition of anonymity and confirming a report in Monday’s editions of The New York Times. The NASD investigation already has resulted in several disciplinary actions.
Also, Merrill Lynch has fined two managers of brokers fired in October for improper trading, a source familiar with the issue said Monday. The source, who spoke on condition of anonymity, confirmed published reports that Curtis Brown, now regional director in San Francisco, and Andy Williams, who oversees Merrill’s mid-Atlantic region, paid a combined $250,000 in fines. A Merrill Lynch spokesman declined to comment.
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