SEC’s Campos Sought Fines for Heartland

A member of the Securities and Exchange Commission says the agency should have dealt more harshly with four independent directors at Heartland Advisors Inc., a mutual fund group sued by the SEC last week.

Amid a rash of scandals in the $7-trillion fund industry, SEC Commissioner Roel Campos said he cast the dissenting vote when the commission voted 3 to 1 in a closed meeting on a settlement with the independent directors of Heartland.

Heartland and some of its current and former officers were charged Thursday with fraud and insider trading by the SEC in connection with mispricing of shares in municipal junk bond funds and concealment from investors of problems in the funds.

The charges involved two Heartland bond funds whose values plunged sharply in 2000. The funds were placed in receivership in 2001. Heartland, which also runs stock funds unaffected by the case, has said it would vigorously contest the charges.

Campos said the four independent directors had not moved to protect the liquidity and solvency of the fund or make sure pricing of fund shares was accurate, despite warning signs.

“They failed miserably to do any of those things,” Campos said, adding he would have preferred harsher measures, including monetary penalties.

The four independent fund directors -- John Hammes, Gary Shilling, Allen Stefl and Linda Stephenson -- were criticized by the agency for failing to look after investors’ interests.

Without admitting or denying wrongdoing, the four agreed to settle an SEC administrative order accusing them of “negligent failure” as directors. The four agreed not to violate securities laws in the future.

The SEC seldom takes action against independent directors. In this case, it did take action, but no monetary penalties were imposed. Nor were the four barred from serving as officers or directors in the future.

The directors’ attorney declined to comment.

Mutual funds, like corporations, have directors who are paid to oversee how they are managed.

The Heartland case resulted from an SEC investigation of fund share mispricing that predated the trading abuse scandals, but directors came in for criticism here as well.

Still, the commission said, its settlement with the directors was influenced by the fact that they “were lied to by the funds’ advisor regarding the status of the funds, hired experts to assist them in performing their duties and engaged in subsequent remedial actions.”

But Campos said of the settlement: “It’s too light for a situation like this.... This particular group needed monetary sanctions and they needed an officer-and-director bar.”

SEC Chairman William H. Donaldson and commissioners Harvey Goldschmid and Cynthia Glassman voted in favor of the settlement, while Commissioner Paul Atkins recused himself, sources said.