According to the Globe, sales staff for the funds owned by Fleet made oral agreements with the select investors – hedge funds that specialized in rapid-fire trading into and out of the funds – often with the knowledge or approval of the managers of the targeted funds. The Globe said regulators are trying to find out whether senior managers at the fund business knew of, and approved, the improper arrangements.
The agreements set limits on the amount and frequency of trading in the funds to keep the market-timing to amounts that mutual fund officials at the time believed would not harm the funds’ operations or performance, the newspaper said. But the market timers often traded more than they were allowed to, and on some occasions, Fleet’s fund employees moved to stop the trading. But, at other times, the market timers were able to keep trading, according to these officials, some of who said the additional trades weren’t detected by Fleet’s employees or systems.
Last month the company disclosed that the US Securities and Exchange Commission (SEC) is preparing to charge two of its Columbia funds units for allegedly misleading investors about its market-timing policies and practices (See Fleet Unit Receives SEC “Wells Notice” ). In its disclosure, Fleet said the “majority” of trades were in just three funds, one international and two domestic-based, and most were done by “three entities.” It did not name the entities or the funds involved.
Fleet spokesman James Mahoney said yesterday, “market timing in Columbia funds was extremely limited, and Columbia was ahead of the curve in instituting reforms, most notably imposing redemption fees of 2% on certain funds susceptible to market timing in February 2003.”
Fleet’s Columbia Management Group, with $160 billion under management, is the third Boston mutual fund complex implicated in the industry wide scandal, along with MFS Investment Management and Putnam Investments.
In Fleet’s case, the market-timing arrangements involved more than a half-dozen investors, officials said, and trading was concentrated in several of the Liberty brand funds, which Fleet acquired in November 2001. Earlier, the funds were owned by Liberty Financial Cos. of Boston, which was majority-owned by Liberty Mutual Group. However, as Fleet has disclosed, the market timing was initiated in 1998, when the funds were still owned by Liberty Financial.
The Liberty funds have been implicated in another case involving former brokers at Prudential Securities’ Boston office who have been charged by the SEC and Massachusetts regulators with running a market-timing scheme on behalf of several hedge funds (See Prudential Securities Charged with Late Trading ). The brokers, Martin Druffner and Justin Ficken, have testified to regulators that Liberty employees advised them how to evade trading blocks the funds placed on their accounts, according to testimony reviewed by the Globe.
Fleet set aside $50 million in its most recent fourth quarter for legal contingencies, including the mutual fund trading matter, and a separate investigation of its stock-trading specialist unit. Fleet is expected next week to settle charges that the specialist business that handles trades on the floor of the New York Stock Exchange improperly traded ahead of its clients, according to an official involved in the case.
Along with late trading, market timing has been a key focus of the continuing federal/state probe of abusive fund trading practices.
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