A Pittsburgh mutual fund company agreed to pay a total of $100 million to settle illegal-trading investigations brought by New York Attorney General Eliot L. Spitzer and the Securities and Exchange Commission in what may be the last of the big regulatory settlements in the mutual fund industry.
The settlement, by Federated Investors Inc., brings to 14 the number of financial firms that have settled improper-trading charges since Spitzer first brought charges against Canary Capital Partners LLC, a New Jersey-based hedge fund, in September 2003. So far, mutual fund companies and hedge funds have agreed to pay $3.3 billion in fines and restitution as a result of the probes, which have shaken the giant mutual fund industry.
"With this agreement, virtually the entire mutual fund industry has now sworn off improper trading practices and agreed to compensate investors who were harmed," Spitzer said in a statement.
Federated said it agreed to pay $72 million in civil penalties and other restitution as well as cut its investment advisory fees by $4 million a year over the next five years. The company already had paid $8 million under an earlier deal.
In a letter to shareholders, J. Christopher Donahue, Federated's president and chief executive, said that the settlement would "close a difficult chapter" and that the company had taken steps to "deliver a culture of compliance" that would prevent future wrongdoing.
The improper trading involved a practice known as market timing, in which a mutual fund allows a favored investor to rapidly buy and sell mutual funds to profit from small changes in the funds' outlook. The practice distorts the purpose of mutual funds, which are generally long-term investment vehicles, and can harm long-term investors by increasing transaction costs and diluting values by siphoning gains to the favored firm.
According to Spitzer's office, Federated units agreed to provide "secret" timing capacity arrangements with three professional trading firms, "knowing that these arrangements would negatively impact the investment returns of ordinary mutual fund shareholders."
In one deal, Spitzer's office alleges, Federated allowed Canary to conduct frequent trading of six Federated mutual funds. In all, Spitzer's office says Canary made more than $1.6 billion in "timing" transactions. In return, Canary agreed to make a $10 million investment in a Federated-advised fund that generated additional fees for the mutual fund company.
In all, nine mutual fund executives pleaded guilty to fraud and related charges in the Spitzer-led probes.
Spitzer, however, suffered a setback when a Bank of America Corp. securities broker, Theodore C. Sihpol III, was acquitted of 29 charges stemming from the probe in June and the remaining charges were subsequently dropped.