MFS Knew of Market Timing, Did Little To Stop Activities

January 16, 2004 ( - An internal e-mail has revealed MFS senior executives were aware of market-timing activities in 11 of their mutual funds, and rather than stop the practice, they only tried to limit the amount of money going into these activities.

“Effective immediately, MFS will not be taking any new money from market timers, President of MFS Fund Distributors James Fitzgerald said in a May 14 e-mail.   “We currently have $1.3 billion in known timer money at MFS,” the e-mail, obtained and quoted by The Boston Globe, said.

MFS declined comment on the Globe report.

The recent revelation of market-timing activities at the nation’s 11 th largest mutual fund company runs contrary to MFS fund prospectuses, which state “The MFS funds do not permit market timing or other trading practices that may disrupt portfolio management strategies and harm fund performance.”   Additionally, the market-timing allegations cast doubts on MFS’ earlier announcement, that the company had simply not monitored market-timing activities in these 11large-cap domestic stock or high-grade bond funds because the highly liquid holdings that are not susceptible to stale prices and that because they were domestic funds the frequent trading was not detrimental to the funds’ performance or its investment policy (See  MFS Misses Market Timing in 11 Funds ).

Even though market timing – rapid selling in and out of mutual fund shares to try and capitalize on price differences – is not illegal per se, the idea that MFS allowed market timing in its mutual funds, despite the potential for harm to other fund investors, could have serious consequences.

MFS’ market timing practices are under investigation by New York and Massachusetts regulators and the company said earlier that it expected charges from US Securities and Exchange Commission (SEC), and the New Hampshire Bureau of Securities Regulations (See  MFS Expects To Be Charged in Fund Probe ).  In a statement posted on the firm’s Web site, MFS says the firm is ” cooperating fully with the SEC.”   At the same time, MFS stresses that “the SEC notice contains no allegations that any MFS employee was knowingly involved in either late trading or inappropriate personal trading in MFS funds.”

Reports also say MFS has been in talks with New York Attorney General Eliot Spitzer to discuss cutting mutual-fund management fees.   “Talks with MFS have made progress and we’re hopeful of a settlement in the next couple of weeks,” Darren Dopp , a Spitzer spokesman, told the Globe. “Spitzer would be very interested in obtaining” a fee reduction for MFS investors as part of the settlement.”

Should formal charges be filed against MFS, they would join a growing list of mutual fund companies that are now facing 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 ).