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Fred Alger bans market timing

Fred Alger Management Inc. said it has banned rapid trading in and out of its mutual funds, a trading practice that regulators say most funds are legally required to prohibit.
/ Source: Reuters

Money manager Fred Alger Management Inc. said it has banned rapid trading in and out of its funds, a trading practice that regulators say most mutual funds are legally required to prohibit.

On Thursday, James Connelly Jr., a vice chairman who was forced out of the company earlier this month, agreed to pay $400,000 to settle civil charges with the U.S. Securities and Exchange Commission that Alger let certain investors profit from such trades, a practice known as market timing.

Connelly, a 17-year employee who helped lead the firm after its offices were destroyed in the Sept. 11 attacks, was targeted as part of a broader probe by New York Attorney General Eliot Spitzer and the SEC into Fred Alger’s trading practices.

On Thursday, Connelly also pleaded guilty to criminal charges of evidence tampering as part of a probe into whether Alger allowed illegal after-market trading of mutual fund shares.

In a letter to Alger investors on Friday, President Daniel Chung said, “Effective immediately, we will not permit market timing in our funds.”

Most mutual funds have internal restrictions against market timing, which hurts investors by siphoning off profits that the mutual fund makes and diluting the value of shares.

The SEC said that Alger, a New York-based firm with $10 billion in assets, had a market timing policy in one of its fund families, called the Alger Fund. Investors were permitted to make a maximum of only six trades per year.

Hedge funds that market time more typically trade hundreds of times annually. The short-term trading can be used to exploit inefficiencies in how mutual fund shares are priced.

Connelly, who did not admit or deny wrongdoing, violated fraud laws by not disclosing to clients that certain investors were given timing privileges in exchange for making long term investments in other funds, according to the SEC.

An Alger spokesman said the six-trade maximum and related trading policies have been put on hold while it comes up with a new policy to police its trading activity.

It expects to use the SEC’s proposed regulations for market timing, expected to be released later this year, as guidance.

Alger’s internal review is being done by law firm Dorsey & Whitney and accounting firm Deloitte.