Assets of 3 Heartland Funds Frozen in Probe

From Bloomberg News

The Securities and Exchange Commission froze the assets of three high-yield municipal bond funds managed by Milwaukee mutual fund company Heartland Advisors Inc. after it failed to provide audited reports in a timely manner.

At the SEC’s request, a federal judge in Chicago placed Heartland’s Tax-Exempt High Yield Municipal Bond fund, Short Duration High Yield fund and Taxable Short Duration High Yield Municipal fund under receivership. The receiver can manage the fund, suspend share redemptions and liquidate the funds if necessary, the SEC said.

“The [SEC is] taking this action to show the extreme importance of the financial information that mutual funds send out,” said Daniel Gregus, assistant director of enforcement in the SEC’s Midwest regional office in Chicago. “It’s important to protect the investors, to maintain the status quo and to have a receiver take a look at the funds and determine what’s the appropriate course of action to take.”


October’s collapse in price of the Heartland funds, which were concentrated in health-care and multifamily housing bonds, was unprecedented in the municipal market. The high-yield muni fund plummeted about 70%, while its short-duration fund fell about 44% on Oct. 13.

Heartland said the losses were a result of a change in the methods used to evaluate the value of the bonds it held. The losses prompted a class-action investor lawsuit and a formal SEC investigation.

The formal enforcement investigation into the Heartland funds is a “fact-finding mission” and may or may not result in legal action against Heartland, Gregus said. He declined to disclose the scope and focus of the investigation or when it was formally initiated.

The SEC action follows Heartland’s March 2 request to the SEC for a 15-day deadline extension for filing its fiscal year 2000 reports for these three funds. The company’s auditor, PricewaterhouseCoopers, was unable to independently determine the fair value of the securities the funds contain, said Paul Beste, Heartland’s chief operating officer.

Heartland is cooperating with any requests by the SEC, Beste said, declining to elaborate further.

Heartland this month said it expected per-share losses for last year to equal $5.77 for the high-yield bond fund, up 96% over 1999’s 23-cents-per-share losses. The short-duration fund losses are expected to equal $3.93 per share, compared with share losses of 14 cents in 1999, also about 96% higher. The taxable fund improved last year, as investors are expected to lose 38 cents per share. In 1999, investors in the taxable fund lost 54 cents per share, the filing says.