Invesco Funds Group Inc. and a sister mutual fund company have agreed to pay $376.5 million in fines and restitution and to cut fees by $75 million to settle state and federal allegations of predatory short-term trading at both companies.
The settlement is the latest in the year-long scandal that has rocked the $7.4 trillion mutual fund industry since New York Attorney General Eliot L. Spitzer revealed that some fund companies were profiting from secret deals allowing hedge funds and other big clients to engage in quick trades -- called market timing -- that cut into returns for ordinary long-term investors.
Amvescap PLC, the British parent of Invesco, said it had reached a tentative agreement with the Securities and Exchange Commission and Spitzer's office for Invesco to pay $325 million in penalties and restitution and for another subsidiary, AIM Advisors Inc., to pay $50 million. The two firms will also cut management fees by a total of $15 million a year for five years, and Denver-based Invesco will pay the Colorado attorney general's office $1.5 million for investor education and attorneys' fees.
The settlement is the second-highest in terms of penalties and restitution since the beginning of the scandal. The only deal that was larger involved not only market timing but also allegations that Bank of America Corp. facilitated illegal after-hours trading, a more serious charge.
"This sets the high-water mark for a mutual fund company that lost its bearings and allowed big customers to come in and prey on legitimate small investors," said David D. Brown IV, director of investment protection in Spitzer's office. The civil complaint his office filed against the company "is lurid in terms of the sheer volume of the timing and the awareness at the highest level that it was harmful for their investors."
The SEC portion of the settlement is tentative because the five commissioners have not yet approved the deal negotiated by the enforcement staff, Amvescap said. An SEC spokesman declined to comment.
Last winter Amvescap strongly denied wrongdoing and vowed to fight the civil charges filed in December by Spitzer and the SEC.
On Tuesday the firm's executive chairman, Charles W. Brady, said in a statement: "We deeply regret the harm done to fund investors and have taken strong measures to prevent any recurrence. . . . Our fundamental commitment has been -- and must continue to be -- to uphold our clients' trust by putting their interests first. It has been painful for AMVESCAP employees at all levels to learn that these core values were not always upheld, impacting our customers and damaging the reputation of our company."
The SEC and Spitzer's office said in the initial legal filings that Invesco allowed some hedge funds -- investment pools for wealthy people -- to make up to 80 trades a year from 2001 to 2003, when its prospectus said investors would be limited to four. The timers invested $900 million, and Invesco made money by charging management fees, even as the firm's portfolio managers complained bitterly in e-mails that the practice was cutting into returns.
The SEC and Spitzer's office still have civil cases pending against Raymond R. Cunningham, who headed Invesco during the period under investigation.