Khan Denies Deals Influenced Fired Mutual Fund Manager

Rafi M. Khan, the Beverly Hills stock promoter, denies that a star mutual fund manager fired last week amid controversy was influenced by their personal stock dealings.

Portfolio manager John Kaweske, who co-managed nearly half of the $10 billion in funds of industry giant Invesco Funds Group of Denver, was fired Jan. 5 for failing to report some of his own securities trades, including a 75,000-share stake in Irvine-based Cardiac Science, a medical equipment manufacturer that Khan touted.

Invesco is one of the largest institutional holders of stock in ICN Pharmaceuticals, which Khan is trying to take over in a bitter proxy fight.

Kaweske’s dismissal has sparked a national debate about how well the mushrooming mutual fund industry controls the managers entrusted with $2 trillion of the public’s money. Industry watchers are particularly worried about the possibility of “front running,” a practice in which fund managers profit at the expense of fund shareholders by trading in their own accounts before making trades for their funds.

Invesco denied that Kaweske did this, alleging only technical violations of internal reporting rules.

Kaweske contends that his only failing was in not getting the necessary paperwork on his personal trades to Invesco in the time required.

Khan’s nearly year-old fight to unseat ICN founder Milan Panic, the former prime minister of Yugoslavia, will come to a head at a Feb. 1 annual meeting. Critics of Khan have pointed out that some of ICN’s largest holders, such as Invesco and Chestnut Hill Management of Boston, could play an important role in the ongoing proxy fight because they hold large blocks of stock.

Kaweske, who invested for Invesco in several stocks pushed by Khan, bought 75,000 shares of Cardiac Science for his own account without getting written permission from his employer, as required by Invesco rules. However, Khan said in an interview this week that Kaweske did not purchase Cardiac stock for Invesco’s funds.

Cardiac Science was founded by Howard K. Cooper, who was selected by Khan to be on his ICN slate of directors if Khan wins the proxy fight. Cooper was not available for comment Friday.

Khan said he was “amazed” that Kaweske was fired, adding that he did not believe Kaweske would have exerted any influence over the ICN battle because of his personal holdings.

“He is an honorable, a good portfolio manager,” Khan said. “There is no connection between me and Kaweske other than he is one of my clients.”

Khan said that he brought Kaweske to Cardiac Science because as a small company, which has not recorded any revenue yet, it was too risky a stock for a mutual fund portfolio.

The Securities and Exchange Commission reportedly is examining Kaweske’s personal records.

According to published reports, the SEC is also looking at the personal trades of several portfolio managers of Fidelity Investments, another frequent client of Khan’s, to see if they were involved in front running.