Piper Fined $2 Million Over Nondisclosure
Piper Jaffray Inc., a century-old investment company, was fined nearly $2 million on Wednesday for failing to fully inform investors about the risks of a fund that lost nearly $140 million.
Piper also agreed to spend $1.7 million to improve its supervisory and compliance procedures.
The fines announced by regulators are in addition to $67 million Piper paid investors in a court-approved settlement late last year.
Piper did not admit any wrongdoing. The penalties are some of the largest imposed by the National Assn. of Securities Dealers, an industry self-regulatory group, and the Minnesota Department of Commerce. NASD fined the Minneapolis-based mutual fund company $1.25 million, and the Minnesota agency fined Piper $650,000 for allegedly violating state securities law.
“In an era of increasingly complex financial products, we, as regulators, have got to be especially vigilant and forceful to ensure that investors know and understand the risks as well as the potential rewards,” NASD spokesman Mark Beauchamp said. “In the Piper case, they didn’t understand the risks of these investments.”
Regulators said the fines send a signal to financial firms to fully disclose the risks of the products they peddle to investors.
The penalties relate to steep losses in 1994 in Piper’s Institutional Government Income Portfolio. The fund was billed as aiming to preserve investors’ capital, but some investments were in risky derivatives of mortgage-backed securities.
However, the fines were viewed by some as relatively minor compared with the $12 billion in assets managed last year by Piper, a 101-year-old investment firm that is among the best-known in the Midwest.
“It’s a slap on the wrist,” independent analyst Perrin Long said. “It will bring unfavorable publicity, but fortunately our memories in this country are very short-term and people will forget about it.”
The NASD said Piper’s fund prospectuses failed to disclose adequately an increase in risky mortgage-backed derivatives in the fund between 1991 and ‘93, leading Piper customers to believe the fund was a safe, conservative investment.
It also said the fund was recommended to customers the fund was not suited for, and that customers were not told that the fund’s increased borrowings to buy securities had increased the risk.
“This is an important and expected step in the process of resolving issues related to the Institutional Government Income,” Chairman and Chief Executive Addison L. Piper said in a statement. The company declined to elaborate beyond a prepared release.
The Washington-based NASD, parent of the Nasdaq stock market, hears claims of wrongdoing by brokers and investment firms but rarely issues fines above $1 million. In the Piper case, it levied a fine but was not involved in any arbitration.
