Fund tied to LV broker fined $350 million

Justin Pope

Friday, Feb. 6, 2004 | 9:25 a.m.

BOSTON -- The company that invented the mutual fund 80 years ago was formally swept up in the improper fund trading scandal Thursday, as Massachusetts Financial Services agreed to $350 million in settlements that also forced the ouster of two top executives.

The agreement reached with the Securities and Exchange Commission and regulators in New York and New Hampshire also restricts MFS chief executive John Ballen and president and chief investment officer Kevin Parke from certain types of jobs in the fund industry for three years.

Late Thursday, MFS' parent company, named Robert J. Manning, previously chief fixed income officer, as MFS' new CEO. In a brief statement, Toronto-based Sun Life Financial also expressed satisfaction with the settlement, which does not include any admission or denial of wrongdoing by the company, Ballen or Parke.

MFS will pay $175 million in restitution to investors and $50 million in penalties, as well as reduce fees charged to shareholders by $225 million. Separately, Ballen and Parke will each pay a $250,000 penalty and more than $50,000 back in profits from the company's practices.

MFS is the latest mutual fund company to settle with regulators in a scandal that has engulfed the $7 trillion fund industry and resulted in investigations of dozens of fund companies. It is the nation's No. 11 fund company with about $140 billion under management, and operates what some consider the oldest mutual fund: the Massachusetts Investor Trust, introduced in 1924.

The settlement with MFS is smaller than the one imposed in December on Alliance Capital Management, which included $600 million in fines, restitution and fee reductions. But the suspensions of such high-ranking officials makes this settlement among the most serious civil enforcement actions yet. Top executives at such firms as Pilgrim Baxter and Putnam Investments have lost their jobs, but not directly at the insistence of the SEC.

SEC Enforcement Director Stephen Cutler said at an afternoon news conference in Washington that MFS has a "proud history," but that, "sadly, MFS and Messrs. Ballen and Parke didn't live up to that history."

Tentative details of the agreement, and the likelihood that Manning would take over as CEO, had been previously reported.

MFS acknowledged in December allowing market-timing trades in 11 funds, including Massachusetts Investor Trust, after being notified by the SEC and New York authorities that it would likely face civil fraud charges.

Las Vegas securities broker Daniel Calugar earlier was accused by the SEC of earning $175 million from improper trading in mutual funds managed by Alliance Capital Management and MFS. The attorney general of Massachusetts on Wednesday sued another fund, Franklin Templeton, alleging it let Calugar make $45 million worth of improper mutual fund trades in exchange for his $10 million investment in a Franklin hedge fund.

Market timing is a type of quick, in-and-out trading that skims profit from longer-term shareholders. It is not illegal, but regulators say MFS violated its own fund prospectuses -- and defrauded investors -- by widely tolerating the practice for some customers but not others.

By May 31, 2003, known market-timers held $2 billion in MFS assets, or about 5 percent of its unrestricted funds, the SEC said, adding that MFS routinely informed broker dealers it would tolerate market-timing trades.

According to the SEC, the MFS market-timers included "late traders" who engaged in the illegal practice of trading in funds after the 4 p.m. close of the markets. However, the SEC found MFS did not detect the late trading and the settlement did not directly address any late-trading allegations.

The company said it would vigorously seek restitution from the late-traders, and Cutler said the SEC would pursue them as well.

"We know who you are," Cutler said.

Manning assumes an increasingly common job in the industry: taking over a venerable mutual fund firm and rebuilding its reputation with investors.

"My first priority as CEO will be to talk to our clients, investors and employees to listen to their concerns, answer their questions, and explain to them how we intend to set the highest standards in our industry in our policies and practices," Manning said in a statement.

The agreement to lower fees was part of MFS's settlement with New York Attorney General Eliot Spitzer. It did not include the SEC, which has said such reductions are inappropriate remedies in improper trading cases -- a contention Spitzer sharply disputes.

"The nature of the improper conduct here is the failure of the board to govern a fund in the best interest of the shareholders," Spitzer said. "That failure resulted in many types of abuses -- late trading, market timing and excessive fees."

The settlement also calls for MFS to hire a "corporate ombudsman" and a senior executive to ensure fees are reasonable, among other steps. The state of New Hampshire, to whom Massachusetts authorities referred the case, will receive $1 million for investor education.