Alliance Will Pay $250 Million
As expected, mutual fund group Alliance Capital Management said Thursday that it would pay a record-setting $250 million and cut the fees it charged investors so it could settle fraud charges involving improper trading.
Alliance was accused of letting brokers and hedge funds trade rapidly in and out of its funds’ shares to profit from stale price data in violation of fund policies. It agreed to the largest fraud settlement payment ever by a mutual fund company.
One of several fund groups being probed over such “market timing” misconduct, Alliance agreed to make sweeping reforms in separate settlements with the Securities and Exchange Commission and New York Atty. Gen. Eliot Spitzer.
The Spitzer settlement calls for Alliance to cut investor fees by 20%, or $350 million, for at least five years -- a concession purposefully excluded by the SEC from its deal with Alliance. The SEC sees fee issues as unrelated to an enforcement case focused on trading misconduct.
SEC Enforcement Director Stephen Cutler said at a news conference that the SEC and Spitzer shared the same goals -- “to protect investors and punish wrongdoers.”
But he said, “We don’t agree on every point.... The commission believes the appropriate way to take up fee issues is not in a case about market timing. It is in rule-making and that is what the commission is doing.”
Spitzer said in a statement that the SEC settlement “sells investors short” and the agency suffers from “a fundamental misunderstanding of the root cause of the harm to investors.”
The entire Alliance payment -- consisting of $150 million in repayment of ill-gotten gains and $100 million in penalties -- will be returned to investors harmed by the improper trading that chipped away at their returns.
Alliance, which is majority owned by French insurer Axa, pledged to make a weighted average reduction in fees of 20% on its U.S. long-term, open-end retail funds, beginning Jan. 1, for a minimum of five years.
To improve its governance, Alliance said it agreed to ensure that at least three-quarters of the directors on its funds’ boards would be independent, and its directors would be able to hire staff to assist them in their jobs.
Ethics and internal compliance committees will be set up and a company ombudsman will be installed to whom Alliance employees can go with any ethics concerns, the company said.
Alliance said it would submit to an independent compliance review at least every other year, starting in 2005.
Shares of New York-based Alliance rose $1.15 to $33.20 in New York Stock Exchange trading Thursday.
Alliance neither admitted nor denied wrongdoing in the SEC settlement. The SEC said its investigation of Alliance and other mutual funds was continuing.
