New York state Attorney General Eliot Spitzer said Fremont has agreed to pay $2.14 million in restitution and disgorgement to injured investors and $2 million in civil penalties. The company, located in San Francisco, advises 12 mutual funds with approximately $3 billion in assets under management as of March 31, 2004. The deal was hammered out with the Securities and Exchange Commission (SEC).
Spitzer said he found out about the market timing activity within the Fremont Funds during his investigation of Canary Capital Partners in the summer of 2003 as the sweeping federal/state fund industry investigation was getting started. Spitzer alleged that from January 2001 to October 2002, Fremont allowed preferred investors to engage in improper, frequent short-term trading of shares of the Fremont Global Fund and US Micro-Cap Fund at the expense of other fund shareholders.
One of the agreements required a quid pro quo: in order to receive permission to time the U.S. Micro-Cap Fund, the timer had to make an investment of “sticky” assets in Fremont’s New Era Value Fund, regulators alleged.
In its announcement of the settlement, the SEC said it had charged former President and CEO Nancy Tengler and former Vice President of Institutional Sales Larry Adams for their roles in the affair. Tengler has also agreed to settle the Commission’s action, agreeing to pay $127,000 in disgorgement and penalties and to be suspended from the industry for six months.
The agreements that FIA made with timers were not disclosed to long-term investors, the officials said. At the same time that certain investors were permitted to time Fremont funds, other investors who made six or more complete exchanges in a year were informed by letter that their trading privileges were being terminated and that “Excessive and unpredictable trading hinders a fund manager’s ability to pursue the fund’s long term goals,” Spitzer charged.
In addition to the market timing, a Fremont employee allowed a brokerage firm to engage in late trading, regulators charged.
As part of the settlement, FIA has also agreed to significant corrective measures designed to create greater board and advisor accountability and to prevent further abusive trading practices, the Spitzer announcement said.
In a Web site statement , a Fremont official said the firm had cooperated with regulators in the probe. “Fremont Investment Advisors and our employees are committed to upholding the funds’ policies to prevent market timing and late trading, and we have worked diligently and cooperatively with the SEC and the NYAG to resolve these issues,” said E. Douglas Taylor, chief executive officer of FIA.