The New York Attorney General’s office and the Securities and Exchange Commission on Tuesday charged Invesco Funds Group and its chief executive with allowing numerous hedge funds to make improper trades in its mutual funds.
Both the SEC and New York Attorney General Eliot Spitzer’s office filed civil charges alleging that Denver-based Invesco’s top management allowed privileged investors to profit from a rapid trading strategy denied to ordinary investors.
The two authorities also filed civil charges against Invesco Chief Executive Raymond Cunningham. Invesco Funds Group (IFG) is a unit of Invesco that offers mutual funds to retail investors.
Spitzer’s office called the conduct a “massive” scheme. Special agreements that allowed certain investors to engage in the practice “were kept secret from the independent members of the funds’ boards and from the funds’ investors,” the SEC said.
“The evidence in this case speaks for itself,” Spitzer said in a release. “Top managers knew market timing was harming buy-and-hold investors but they condoned and facilitated it because it was a lucrative source of management fee revenues.”
On Monday a spokesman for Invesco’s parent, U.K.-based asset management company Amvescap Plc, said that the company would “vigorously” fight any charges filed against it.
The complaints from both Spitzer’s office and the SEC reportedly aim to show that Invesco management allowed numerous hedge funds to market time, a practice in which investors profit from pricing inefficiencies by rapidly trading in and out of the funds.
In 2002, hedge funds had market-timed up to $1 billion in shares in Invesco funds, the person said.
Unlike the trading of mutual funds after the market closes, another practice being probed by regulators, market timing is not illegal. However, fund companies that publicly discourage investors from engaging in the practice and then allow selected investors to do it may be in violation of their fiduciary duties.
“IFG has not engaged in any wrongful conduct,” said Douglas Kidd, managing director of corporate affairs for Amvescap, in a statement. “Any charges that may be filed against IFG or its employees will be vigorously contested.”
Last week, Amvescap, which has $354 billion of assets under management, said it expects to face federal and state civil charges over improper mutual fund trading.
Kidd said that Invesco has responded to regulators’ allegations in a so-called Wells submission to the SEC. The company defended its actions with facts, information on industry practices, and public policy considerations that demonstrate compliance with its legal obligations and duties to its clients.
Invesco is the latest asset manager to be targeted in the rapidly growing probe. Last week regulators filed criminal charges against three top executives at pension fund trustee Security Trust Co., and ordered the Phoenix, Arizona-based company to dissolve its business.
In other news, Federated Investors has reportedly acknowledged accepting after-hours orders from an investment firm on 15 occasions. One employee has been fired.
Separately, on Wednesday the SEC is expected to propose a range of reforms for the mutual fund industry.
One proposal is expected to be a strict deadline for mutual funds to receive orders placed at that day’s price — a measure meant to fight late trading. After-market trading at the pre-market close share price is illegal.
The SEC’s package — which will undergo weeks of public debate — is also expected to include proposals that every fund company hire a compliance officer answerable to the board; adopt clearer procedures for combating market timing; and use fair-value pricing more frequently where possible.