The fraud allegations came in an enforcement action by the New Hampshire Bureau of Securities Regulation, which alleged in a written complaint that the firm’s advisors got bigger bonuses for sticking with the in-house funds, according to news reports.
The firm was charged with violating state and federal securities laws requiring advisers to act in clients’ best interests and to disclose conflicts of interest that could potentially affect their recommendations. The agency, which investigated practices from 1999 to 2003, asked a hearing officer to impose penalties of up to $17.5 million, including restitution.
“American Express had a pervasive sales culture that was established and managed with one thing in mind — to push American Express products and other products that in many cases benefited American Express at the expense of its clients,” Mark Connolly, the New Hampshire bureau’s director, told the Wall Street Journal.
Although a company spokesman would not discuss the allegations, he insisted that American Express would work with regulators in the matter. “We have been cooperating with the state of New Hampshire on this matter and we will continue to work with the state to help bring this matter to a resolution,” David Kanihan, a spokesman for American Express’s financial-advisory business, told the Journal.
New Hampshire regulators asserted that investors were harmed by the company’s sales practices because American Express funds had lackluster returns. Over the five years ending January 31, fewer than a quarter of the company’s fund offerings beat their comparable Morningstar averages. Through their complaint, New Hampshire regulators are attacking the integrity of the unit’s signature product: financial plans that the company promotes as tailored to customers’ needs but that regulators say were used primarily to push American Express mutual funds.
But the in-house funds’ poor showing apparently didn’t stop American Express from pushing its advisors hard to focus on the proprietary offerings, according to e-mails collected by the state. Officials say the e-mails show supervisors praising advisers who sold American Express funds and chiding those who didn’t, offering advisors who pushed a new in-house fund a free year-long lease on a Mercedes-Benz car.
The regulators say the firm also gave more emphasis to sales of proprietary funds in calculating bonuses to senior executives. In 2003, Larry Post, American Express Financial Advisors group vice president for New England, received more than $1 million in compensation, including roughly $900,000 in bonuses, some of which were tied to sales of proprietary products, the state said in its complaint.
New Hampshire’s enforcement actions comes at a particularly embarrassing moment for the Minneapolis-based American Express Financial Advisors in light of the recent American Express announcement of its intent to spin off the advisor unit, which analysts value at about $10 billion ( American Express to Spin off Financial Advisory Business ).
Securities firms get commissions for selling both in-house and outside mutual funds, but they can profit more from selling in-house offerings because they receive continuing money-management fees as long as the customer stays in the fund.