An announcement by New York State Attorney General Eliot Spitzer said that the Kansas City-based fund management company agreed to pay $50 million in restitution to investors. The firm will also make fee reductions totaling $25 million over the next five years and agreed to a series of management reforms.
“The evidence in this case showed that company officials didn’t just look the other way at timing activities, they facilitated the transactions with full knowledge that small investors were being harmed,” Spitzer said.
Spitzer’s investigation found that Waddell & Reed managers entered into secret agreements with mutual fund timers. Under these agreements, the timers paid extra fees to the company in exchange for trading privileges that it denied typical investors. Specifically, in exchange for fees ranging from 0.25% to 1% of the timers’ money, the company exempted the timers from trading limits and other anti-timing policies put in place to protect long-term investors, said prosecutors.
Investigation also determined that Waddell & Reed’s senior management knew timing activity was harming the firm’s small investors, but the company did nothing to stop the harmful activity for a period of 18 months. During that time, the company’s prospectus created the impression that Waddell & Reed vigorously policed timing activity, Spitzer’s statement said.
“These settlements have been in process for some time and relate to matters well in our past,” said Henry Herrmann, CEO of Waddell & Reed. “Our success in settling other legal and regulatory matters, and the elimination of the distraction they had caused, has already shown itself in the results of our business performance.”
Under the agreement, Waddell & Reed will increase efforts to halt market timing, take steps to ensure that fees charged to investors are negotiated at arm’s length, establish an independent board of directors and improve disclosure of fees and expenses to investors.
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