Alliance Board Members May Have Known of Market Timing

December 17, 2003 ( - E-mails obtained by the Wall Street Journal suggest some heavy hitters at Alliance Capital Management Holding LP were not only aware, but authorized, market-timing activities at some of the firm's accounts.

As evidence of this contention, the Journal points to an e-mail that Roger Hertog, vice chairman of Alliance Capital, was included on that discussed details of one particularly large market-timing arrangement.   The arrangement authorized a Las Vegas-based broker to engage in market-timing trades in a number of the firm’s mutual funds, according to a Wall Street Journal report.

Additionally, the e-mails suggest that Bruce Calvert, Alliance’s board chairman, was not only familiar with the arrangement, but also approved it.   This revelation puts Hertog and Calvert in the same boat as John Carifa and Michael Laughlin, who were asked to resign last month at the firm’s request, because of their involvement with “inappropriate” market timing including some transactions that hurt the company’s fund shareholders (See  Alliance Capital Execs Forced Out by Trading Scandal ).  Carifa was president, chief operating officer, and director of Alliance Capital, and chairman of the board of its mutual funds. Laughlin was chairman of Alliance Capital’s mutual fund distribution unit.

In fact, two of the e-mails obtained by the Journal were exchanged between Laughlin and Carifa on January 29, 2002 and copied Hertog. The e-mails, with the subject line “Alliance Technology Fund,” detail the arrangement allowing the Las Vegas broker – Daniel Calugar – to engage in market-timing trades in a number of the firm’s mutual funds in connection with his investments in Alliance hedge funds and other products.

Even though the market timing, the rapid buying and selling of mutual funds in an attempt to take advantage of price discrepancies, is not illegal, the activity posses a problem for Alliance Capital.   Alliance, like many other investment management firms, publicly discourages such activity in its mutual funds’ prospectuses.

The firm, though, has publicly admitted to allowing this activity, saying that these timing arrangements were made “in return or in connection” with those timers making long-term investments in other Alliance products on which the company would earn management fees.   This in turn has landed Alliance under the intense scrutiny of New York Attorney General Eliot Spitzer and the US Securities and Exchange Commission (SEC) (See  Spitzer Fund Abuse Probe Pumps Out More Subpoenas) .   Now Alliance, one of the nation’s largest publicly traded money managers with roughly $456 billion under management , has been in active talks to settle civil-fraud charges that the firm is facing from the fallout of investigations.

As part of a proposed settlement, Alliance is offering to reduce management fees on its mutual funds by 20%, pay a $250 million fine and make a number of changes to how its funds are run (See  Alliance Offers 20% Fee Reduction Over Five Years ).