New York Attorney General Eliot Spitzer was moving Thursday to reach settlements with fund firms involved in the Canary Capital Partners scandal, while the NASD said it has launched 12 investigations into how brokerages sold funds.
The SEC also says it’s expanding investigations into how fund companies allocate initial public offerings. Spitzer and the SEC made similar allegations against stock underwriters like Citigroup Inc.’sSalomon Smith Barney and Credit Suisse First Boston.
Now, regulators seem to be pursuing allegations that fund companies played games with investors’ money in allocating shares of hot IPOs to pad performance, said Richard Ferri, an independent portfolio manager who manages $220 million in institutional and private assets but runs no mutual funds.
“If an IPO underperforms, then word on the street is that some companies will put most of those shares into bigger funds,” he said. “If they do really well, they might allocate more to smaller funds to more dramatically inflate performance data to investors.”
Canary Capital agreed to a $40 million settlement in September after allegations surfaced that it was making after-hours trades. Funds named by regulators in that case include Janus Capital Group, Strong Capital Management, Bank of America’s Nations Funds and Bank One.
Bank of America was alleged to have let Canary trade after hours. Spitzer’s complaint claimed the other three let Canary market-time their funds. That involves buying and selling shares of funds quickly to profit from stale prices. The practice isn’t illegal. But most funds discourage it, since costs are driven up and profits watered down for those investing more long term.
Reports were mixed as to how far settlement talks have progressed. Unconfirmed sources also surfaced indicating that Spitzer was leaning closer to charging Richard Strong. The founder of the Milwaukee-based fund company bearing his name gave up his chairman’s title last week amid allegations of improper fund trading.
“Some of these people at fund companies have come to believe they’re untouchables,” said Ferri. “The fund industry has been squeaky clean up to this point. There’s no reason for what’s unfolding.”
Some funds are trying to be more proactive. Alliance Capital Management said Thursday it had uncovered possible market-timing improprieties. It manages $38 billion in assets and is owned by French insurance giant Axa. The firm said it’s conducting an internal probe and has formed a special committee made up of outside directors to conduct the investigation. It admitted that regulators had warned Alliance that charges might be filed against it leading to sanctions or fines.
In congressional hearings Thursday, the NASD expects to bring at least one major case against a brokerage within weeks, said NASD Vice Chairman Mary Shapiro.
In testimony earlier this week, the SEC said it’s pursuing cases involving excessive 12b-1 fees. Those are yearly charges funds agree to pay brokers and distributors for marketing their funds.
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