MFS Nears Settlement As Late Trading Allegations Emerge

January 23, 2004 ( - MFS Investment Management and federal and state regulators are close to striking a $200 million deal that would involve slashing management fees charged to investors.

The anticipated $200-million payment would include a fine and disgorgement of monies collected from market-timing businesses, to compensate shareholders for losses their portfolios suffered due to the improper trading.   The cutting of management fees was not outlined, according to a Boston Globe report.

Reports of a settlement come as the nation’s 11 th largest mutual fund complex was under investigation for market-timing practices in its mutual funds and was involved in negotiations with regulators from the US Securities and Exchange Commission (SEC), New York Attorney General Eliot Spitzer’s office, and the New Hampshire Bureau of Securities Regulation (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.”

All parties involved in the reported deal caution that an agreement has not yet been formalized and that the deal could still come undone. “We are close and are hopeful of reaching a settlement. Until we do, however, we’re not in a position to comment on details,” Darren Dopp, a spokesman for Spitzer, told the Globe.

If finalized, the MFS settlement would be somewhat smaller than the one reached in December by Alliance Capital Management. The New York City investment firm agreed to a $250 million restitution payment in a joint settlement with the SEC and Spitzer, and separately agreed to Spitzer’s demand to cut fund-management fees by 20% for five years (See  Alliance, Regulators Reach Settlement ).

Late Trading Allegations

Revelation of the settlement comes as the Wall Street Journal is reporting illegal late-trading activities at MFS cost mutual fund shareholders approximately $100 million.   The Journal, citing an internal company inquiry, says the Boston-based MFS determined that investors made the trades through more than 10 different broker dealers, including Security Brokerage Inc, and the clearing arms of Bank of America Corp and Bear Stearns Cos.

MFS maintains it had no knowledge of any late-trading activity in its mutual funds, and says that like its investors, the firm too was a victim.   While MFS may not have know of the alleged late-trading, the illegal action of placing mutual fund orders to buy or sell fund shares after the market’s close, last week it was revealed that senior executives at the firm 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 (See  MFS Knew of Market Timing, Did Little To Stop Activities ).

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.