Alliance Offers $250 Million to End Probe
Alliance Capital Management has agreed to pay $250 million to settle investigations by the New York attorney general and the Securities and Exchange Commission into improper mutual fund trading, people familiar with the matter said Friday.
The payment would be a significant milestone in the 3-month-old fund scandal, marking the first financial penalty assessed against a fund company. It also could be a benchmark to help determine the payments likely to be required of other fund firms that have been implicated.
The money would be set aside to reimburse Alliance investors who were hurt by trading abuses.
An Alliance deal also would set a precedent because the firm already has agreed in principle to reduce its portfolio management fees as part of a settlement with Eliot Spitzer, the New York attorney general, sources said.
Federal and state regulators and Alliance lawyers still are negotiating key details of the proposed settlements, sources said, and the talks could yet break down.
But Alliance’s acquiescence to the payment and lower fund fees indicates that it may be anxious to strike a deal. Alliance wants its name removed from the litany of companies under investigation because it fears the loss of clients, especially large institutions that shun money managers tainted by controversy, industry experts said.
The mutual fund scandal primarily has involved allegations of fast-paced trading in fund shares by company insiders or by favored investors in recent years, at the expense of buy-and-hold investors.
New York-based Alliance previously had admitted that it allowed “a number of market timing relationships” that “had an adverse effect on” investors. Two Alliance executives, a fund manager and a hedge fund salesman have resigned, and the company said that others had been or would be asked to leave.
The potential settlement would resolve the probes of Alliance, but charges still could be brought against individuals, one source said.
Spokesmen for Spitzer, the SEC and Alliance all declined to comment.
The $250 million would go toward a restitution fund to reimburse aggrieved Alliance investors. The payment would be made by Alliance and wouldn’t be charged to its funds.
Experts said the size of the payment would be notable, comparing it to the payments made by Wall Street brokerages this year to resolve probes of stock analyst misconduct. In that settlement, Citigroup Inc. paid $400 million and two other brokerages paid $200 million each.
“This is large, there’s no question,” said John Coffee, a Columbia University law professor. But he added that, over time, “investors will get a lot more from reduced fees than they’ll get from $250 million” spread among perhaps tens of thousands of investors.
The payment could have a major effect on the scores of private investor lawsuits against fund firms because its size would imply serious wrongdoing, said Henry Hu, a law professor at the University of Texas at Austin.
“Alliance cannot say this $250 million is for charitable purposes,” he said.
Alliance last month took a $190-million charge to earnings to cover expected restitution and legal costs from the scandal.
The company earned $276 million through the first nine months of this year. It earned $611 million last year.
The idea of Alliance’s lowering its fund management fees as part of any settlement has stirred a controversy among regulators. The fee cut would be required by Spitzer but not by the SEC, which has qualms about forcing the reduction of fees when the alleged wrongdoing doesn’t involve those costs.
Alliance’s fee reductions would apply to all of its funds, not just those in which improper trading occurred, one source said.
But other details, such as the total amount by which fees would be lowered, are unclear.
Thus far in the fund scandal, Putnam Investments has reached a partial settlement with the SEC that calls for sweeping reforms of its business practices and for penalty and restitution payments to be made, but the amount hasn’t been set. No other fund firm has been fined.
