Eliot Spitzer, New York attorney general, will step up his reform of mutual fund trading by filing several civil and criminal charges against fund companies.
The purpose of the moves is to create a steady drum beat of charges that will lead to structural reform of the $7 trillion U.S. fund management industry. His initial targets, people familiar with the plans say, include the Invesco unit of Amvescap, Strong Capital Management, Alliance Capital Management and Security Trust. Scores of other fund management companies are also under investigation by Mr Spitzer’s office and other regulators, including the US Securities and Exchange Commission.
Any accusations will be accompanied by lawsuits from the SEC, the US’s chief financial regulator. Its division of enforcement is conducting the investigations in tandem with Mr Spitzer’s office. In spite of occasional inflammatory rhetoric, the two regulators are working well together at an enforcement level, people on both sides agree.
The charges expected to be filed over the next two weeks by Mr Spitzer’s office, whether criminal or civil, are likely to be connected to failure to stop improper short-term trading, known as market timing, which decreases returns for long-term investors and is discouraged by most fund companies. The practice was pervasive at some of the companies and in some instances was condoned, promoted and committed by senior executives, the people familiar with the matter said.
A spokeswoman for Mr Spitzer declined to comment. The SEC would not comment. At the end of last week discussions were still being held among lawyers, delays could occur and settlements could be reached.
Mr Spitzer and the SEC are seeking substantial financial penalties from their targets as well as prescriptive remedies - agreements by targeted funds to change their practices, including governance. Because the regulators are working together, Mr Spitzer should be able to avoid SEC criticism, voiced in the past, that he is initiating structural reforms for the whole industry when it is not New York state’s job to do so.
Mr Spitzer kicked off his attack on market timing in September when he wrangled a $40m settlement from Canary Capital Partners, a hedge fund he charged with illegal and improper trading of mutual funds managed by Strong, Janus, Bank One and Bank of America.
He also alleged that Security Trust, known as STC, helped Canary camouflage its improper trading. Security Trust said it was co-operating with authorities. Calls to Strong, Alliance, and Amvescap were not returned.
The investigations and charges have resulted in the outflow of billions of dollars from mutual funds tainted by the scandal, which has also had a human toll. A now former Bank of America employee was criminally charged because of his role with Canary.
The chief executive of Putnam was ousted and Richard Strong, who runs Strong Capital Management, was accused of using market timing to make money for himself and his family. He has since stepped down as chairman of Strong Mutual Funds, but his role at the company has not changed.