The crackdown on mutual funds continued Tuesday as regulators filed civil-fraud charges against two FleetBoston Financial Corp. units, alleging they secretly allowed a few customers to engage in market timing frequent trading that can reduce performance for long-term fund investors.
FleetBoston’s fund-management unit, Columbia Management Advisors Inc., and its broker-dealer, Columbia Funds Distributor, were named in the civil suit, filed by the Securities and Exchange Commission in federal court in Boston. A related action was brought by New York Attorney General Eliot Spitzer, who kicked off a probe of the $7 trillion fund industry last fall.
The SEC claims FleetBoston’s fund distributor secretly arranged deals that allowed a few companies and individuals to market time some Columbia funds, including international funds and one aimed at young investors. The SEC said the fund company got long-term assets from the favored customers who market-timed at least 16 different Columbia funds. The fund firm knew and approved of all but one of the deals and allowed them to continue even though they could hurt long- term investors, the SEC said. Regulators claim fund investors were deceived because printed materials from Columbia said the firm didn’t allow short-term or excessive trading. The fund’s board of directors was kept in the dark as well, according to regulators.
“Columbia had one set of rules for small investors and another secret set of rules for certain big money players,” Peter Bresnan, the acting district administrator in the SEC’s Boston office, said in a prepared statement on the case. The SEC said it will continue to aggressively pursue companies that allow harmful trading in their own mutual funds.
The SEC is demanding a jury trial and wants to force Boston-based Columbia to repay investors for losses, pay a fine and be barred from advising mutual funds in the future.
Columbia’s attorney wasn’t immediately available to comment on the case.
David Bergers, an associate district administrator in the SEC’s Boston office, said Columbia and its distributor profited by bending the rules for select clients, including Ilytat, LP, San Francisco hedge fund, and Edward Stern, founder of a New Jersey hedge fund that previously settled with Mr. Spitzer for alleged trading abuses.
“These arrangements created clear conflicts of interest,” which weren’t disclosed to independent directors on Columbia’s board, Mr. Bergers said in a telephone interview.
The alleged trading abuses may have started in 1998, and continued through 2003, generating more than $2.5 billion of trades, according to the SEC.
FleetBoston acquired Columbia, formerly known as Liberty Financial Group, in November 2001. Although market timing isn’t illegal, Liberty and Columbia stated in fund prospectuses that it didn’t permit such trading because it might be ” disruptive.”
Ilytat made several hundred trades in Columbia’s international funds in exchange for placing $20 million into a related fund, the Newport Tiger Fund, which invests in Asian stocks, the SEC alleged. Only one-third of the sum was supposed to be used for market-timing, but by mid-2000, it appeared as if Ilytat was trading upwards of $7 million a week in the Newport Tiger Fund, the SEC said.
Ritchie Capital Management, Inc., another hedge fund, also traded frequently in the Newport Tiger Fund, according to court documents filed by the SEC.
Daniel Calugar, who was previously charged by the SEC in another fund-trading case, allegedly arranged to invest $50 million in Columbia’s Young Investor Fund and its Growth Stock Fund in exchange for once-monthly market-timing privileges. Instead, the SEC said Mr. Calugar made trades every day, racking up more than 200 trades in 2000 in the Young Investor Fund, which was designed to teach children about fund investing.
Some of the other Liberty funds allegedly hit by market timing include the Acorn International Fund, the Acorn International Select Fund, formerly known as the Acorn Foreign Forty Fund, the Stein Roe International Fund, and the Columbia International Equity Fund, formerly Galaxy Equity Growth Fund.
The SEC said its investigation into the case is continuing.
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