MFS Expects To Be Charged in Fund Probe

December 9, 2003 ( - Massachusetts Financial Services Co. (MFS) is battening down the hatches in anticipation of fraud charges from the US Securities and Exchange Commission (SEC) for allegedly lying to investors about short-term trading in the firm's mutual funds.

Toronto-based Sun Life Financial Inc., the owner of Boston-based MFS, said in a statement that SEC investigators in the Boston office are planning to recommend to the full commission that an enforcement action be taken against MFS, the nation’s oldest mutual fund company.   This comes as MFS said in a separate statement that the firm had not monitored market timing in 11 of its mutual funds, saying it did not feel such trading in those funds could harm fund performance, according to a Washington Post report.

Additionally, Massachusetts Secretary of the Commonwealth William Galvin is investigating MFS over the same allegations.   Both federal and state regulators are examining whether MFS’ statement in its “fund prospectuses concerning market timing was false and misleading, and breach of fiduciary duty,” the MFS statement said.

The probe into MFS, the 11 th largest mutual fund company in the United States with $175 billion under management, began with testimony from brokers at the former Prudential Securities that an MFS employee told them that certain funds could be market-timed, despite the prospectuses’ stance against such activity.   With this allegation, federal and state regulators turned their investigation to whether MFS allowed timing as a way to increase its assets under management – and consequently its fees – at a time when its overall business was declining.   Further, federal investigators believe senior managers at MFS were aware of the policy.

As an example, the Washington Post report points to the MFS Emerging Growth Fund.   In that fund’s prospectus, it states, “MFS funds do not permit market timing or other excessive trading practices that may . . . harm fund performance.”   However, one of the former Prudential brokers told Massachusetts regulators about “a document [in which] MFS states, ‘These funds are free to be market timed.’  

The former broker said similar statements existed for its Massachusetts Investors Trust Fund, Massachusetts Investors Growth Fund, MFS Research Fund and MFS Total Return Fund.

In the firm’s statement to investors, MFS said, ” We are cooperating fully with the SEC,” at the same time denying all wrongdoing in the matter.   The statement went on to say the 11 funds that the firm did not monitor trading activity for, would now come under scrutiny from MFS.   “MFS now has exchange limits on all 105 funds in the MFS fund family,” the statement said.

Should formal charges be filed against MFS, they would join a growing list of mutual fund companies that are nowfacing charges in the mutual-fund trading scandal.   Included on that list are Putnam Investments (See  Putnam, SEC Reach Securities Fraud Settlement ) and Invesco Funds Group (See  Prosecutors: Invesco Engaged in Massive Market Timing Scheme ).