Prosecutors: Invesco Engaged in Massive Market Timing Scheme

December 2, 2003 ( - Invesco Funds Group and its president and chief executive officer Raymond Cunningham on Tuesday were slapped with parallel state and federal civil fraud lawsuits in connection with allegations of widespread market timing.

With the filings by the US Securities and Exchange Commission (SEC) and New York State Attorney General Eliot Spitzer, the Denver-based Invesco and Cunningham become the latest target in a wideranging state/federal probe into abusive fund trading practices. The investigation has focused primarily on market timing and late trading transactions.

The SEC’s  lawsuit , filed in US District Court for the District of Colorado, alleged IFG and Cunningham accepted the market timing transactions from dozens of investors in order to boost IFG’s management fees. That was despite the fact that market timing was in violation of the company’s own policies, which stated that exchanges between funds by investors would be limited to four yearly and that changes in this policy would only be allowed if it was in the best interests of the funds. Regulators are seeking the return of profits made from the market timing as well as civil penalties

Invesco Funds denied any wrongdoing Tuesday and said it would “vigorously” contest any charges against the company or its employees. In a  statement from Invesco’s parent, AMVESCAP, the fund house said it had tried to curb “harmful” market timing transactions.

AMVESCAP also argued that its position was made more difficult without clear market timing laws and rules. “ In this highly regulated industry, no clear regulations or directions have been provided that bear specifically on which market timing activities should be permissible and which should not, nor what approaches a fund complex can or cannot take in trying to cope with market timers consistent with the best interests of its shareholders,” the AMVESCAP statement contended. “Unlike late trading – which is clearly illegal and which IFG never knowingly facilitated or permitted – market timing is a lawful activity. “

Secret ‘Special Situations’

According to the SEC, from at least July 2001 until October 2003, IFG and Cunningham fraudulently accepted market timing transactions from investors who were dubbed “Special Situations.” These Special Situations were kept secret from the independent members of the funds’ boards and from the funds’ investors.

“IFG and its CEO willingly sacrificed the interests of mutual fund shareholders when market timers dangled the prospect of higher management fees in front of them,” said Stephen Cutler, Director of the SEC’s Division of Enforcement. “By granting special trading privileges to selected customers, they readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds’ prospectus disclosures on market timing.”

In civil charges filed in New York State Supreme Court in conjunction with the SEC, Spitzer alleged that IFG and Cunningham “engag(ed) in a massive mutual fund timing scheme,” which, at one point generated a pool of approximately $900 million in market times assets by mid-2002. The assets generated million in additional fees.

These mutual fund timing arrangements were highly profitable for both Invesco and the mutual fund timers, but damaged Invesco’s customers by steadily skimming their assets,” prosecutors alleged in court documents. Eventually, the Spitzer complaint alleged, Invesco became a center for fund timers, who pumped billions of dollars of timing trades through its funds.

In addition to Cunningham, the Spitzer complaint also named as being involved in the scheme:

  • Invesco’s senior portfolio manager and Chief Investment Officer, Timothy Miller, who was required to sign off on all timing arrangements
  • Invesco’s Senior Vice President of National Sales Thomas Kolbe who issued the Special Situations policies
  • the head of the Invesco “timing police,” Michael Legoski, who monitored Special Situations and closed out unwanted fund timers.

The largest special situation was Canary Capital Management LLC, a hedge fund that has been at the center of the fund trading scandal, Spitzer’s complaint said.Tuesday’s court filings allege that between June 2001 and June 2003, Canary made roughly $50 million – or a 110 % return – market timing the Invesco Dynamics fund, while long-term shareholders lost 34%.

Spitzer’s complaint acknowledges that not everyone at IFG was an enthusiastic backer of the marketing timing scheme. In one e-mail, a senior executive noted that: “I know (market timers) are costing legitimate shareholders significant performance … This is not good business for us, and they need to go.” In another e-mail, an executive wrote: “(Market timing) is killing the legitimate shareholders of (the Dynamics and Technology) funds.”

The investigation of the mutual fund industry has already resulted in complaints against other well-known fund companies, including Putnam Investments and the Pilgrim Baxter fund family. Others, including Strong Financial Corp. and Alliance Capital Management, have acknowledged that market timing occurred but have not been charged.

Market timing is not illegal, but is strictly limited by most fund companies because it can skim profits from longer-term shareholders and increase transaction fees.