Federal and state regulators yesterday slapped down the company that invented the nation’s mutual fund industry, reaching a $350 million agreement with the Massachusetts Financial Services Co. to settle a case involving trading abuses.
Without admitting guilt, MFS agreed to pay a $50 million penalty and give $175 million back to its investors as restitution under a deal reached with the Securities and Exchange Commission and other regulators including the New Hampshire Bureau of Securities Regulation.
In addition, New York Attorney General Eliot Spitzer’s office negotiated a $125 million reduction in the fees charged clients by the fund over the next five years. Regulators will continue to investigate.
In taking action, the SEC also barred MFS chief executive John Ballen, one of the mutual fund industry’s star portfolio managers, and president Kevin Parke from working at a registered investment company for three years.
Neither executive admitted nor denied wrongdoing. But each agreed to pay a $250,000 penalty and give up $50,000 in gains that regulators say they made through the questionable trading practices.
Ballen has been credited for bringing Boston-based MFS into the forefront of the industry, particularly when he managed the firm’s hot emerging growth fund in the 1990s. Founded as the nation’s first mutual fund in the spring of 1924, Massachusetts Investors Trust built a solid reputation before it became embroiled in the recent scandal. It now ranks as the 25th largest mutual fund company in the United States, according to the Investment Company Institute trade group.
“MFS is one of the pillars of the industry,” said Geoff Bobroff, an East Greenwich, R.I.-based fund consultant. “To have them taken in [by the scandal] and top senior executives being told to withdraw from the industry is major blow.”
According to regulators, MFS allowed traders to engage in both market timing and late trading of many of its funds. In late trading, mutual funds allow select clients to buy and sell their shares after the daily price is set at the 4 p.m. close. The practice is illegal because it allows the traders to complete transactions before other investors can take advantage of changes in price. Market timing is a rapid in-and-out trading of shares done to take advantage of old prices, a practice which harms long-term investors.
Robert Manning, who yesterday took over as the chief executive of MFS Investment Management, stated that the firm worked diligently to reach the settlement.
“While at no time was anyone at MFS aware that this illegal late trading was taking place, under the terms of our settlements, the restitution funds should compensate all shareholders who were harmed,” Manning said in a letter to clients yesterday. “We intend to pursue vigorously restitution from these late traders.”
Consumer advocates applauded the settlement, noting that many mutual funds are going to be taking a hard look at their fee structure as a result of such deals.
“There’s no question that every fund complex is paying attention to these abuses,” said Mercer Bullard, founder of Fund Democracy, an advocate for mutual-fund investors.
Others asserted that the MFS settlement shows how regulators must be more aggressive at reining in excessive costs that funds charge.
“One of the areas we’ve been most critical against the SEC has been its regulation of mutual funds,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “The market is not effectively disciplining costs.”
Indeed, fund industry analysts said yesterday that MFS is not reducing its fees as much as AllianceBernstein, which reached a $600 million settlement with Spitzer’s office and the SEC in a deal that included reducing its fees by 20 percent, or $70 million a year.
Bobroff said the $25-million-a-year fee reduction amounts to an 8 percent cut in advisory fees in a given year, given that MFS made $370 million in fees last year.
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