Investors last month withdrew $4.4 billion net from Janus funds, the biggest withdrawal from any U.S. fund group in the past year. The movement of funds comes after the naming of Janus, among other funds, in an investigation into trading practices by mutual funds and other investment institutions by Eliot Spitzer, New York attorney general, and the Securities and Exchange Commission.
It is the first sign that the fallout from the widening probe is gathering momentum. The investigation has implicated eight companies, resulted in subpoenas being issued to several dozen more, and spawned more than 20 lawsuits.
The SEC said on Thursday its staff was preparing to draw up rules to combat trading abuses. Alongside New York Attorney General Eliot Spitzer, the SEC is investigating late-trading and market-timing transactions in fund shares. The probe has spread to scores of major mutual fund groups, brokerages, hedge funds and other institutions.
Janus, one of the biggest mutual fund groups in the U.S., said its net assets fell by 3.6 percent during September, to $146.5 billion at Sept. 30. It said it had a net outflow of $1 billion from institutional money-market funds - which often see sizeable swings - and an outflow of $3.4 billion from non money-market funds.
The latter is unusually large and appears to show investors have pulled their money from the group after hearing of the investigation, which was announced on Sept. 3. A further $1.1 billion in assets was lost during the month through market depreciation, said Janus.
Deals with 'market timers' ended
Janus said about $314 million of the outflows was the result of ending its arrangements with so-called “market timers,” mainly hedge funds, with whom it had struck a deal to allow arbitraging of its mutual funds in exchange for fees and business, despite publicly stating it discouraged such arbitrage. This practice, which also affects other mutual funds, is under investigation by Mr. Spitzer.
The SEC said on Thursday it was “aggressively investigating” market timing, as well as allegations of late trading, where investors, usually hedge funds, illegally bought mutual fund shares after 4 p.m., but at the 4 p.m. price.
The SEC said “it is clear that there are additional regulatory actions that the Commission should consider in seeking to eliminate or significantly curb late trading and market timing abuses in the future.”
The Spitzer probe has implicated eight companies, with dozens of subpoenas issued. Gabelli on Thursday was the latest group to say it had received a subpoena.
Janus has had large outflows of money in the past two years as its growth-orientated funds have slipped in performance. It is also the target of several class action lawsuits as a result of Mr. Spitzer’s investigation. Although it has not admitted wrong-doing, Janus has held settlement talks with Mr. Spitzer’s office in a bid to put the damaging allegations behind it.