Mutual Funds in California Probed
Federal prosecutors in San Francisco are investigating trading practices at several mutual fund companies based in Northern California, people familiar with the probe said.
At least five companies have received grand jury subpoenas from the U.S. attorney’s office for the Northern District of California, these people said. They didn’t disclose the identities of the firms, although San Francisco-based Dodge & Cox Funds acknowledged that it received a subpoena.
The grand jury also may have asked brokerages and professional investors such as hedge funds for information, the sources said.
None of the firms is necessarily a target of the probe, and receiving a subpoena does not imply wrongdoing. Prosecutors are hunting for evidence of “market timing” or “late trading” arrangements with favored investors that may have hurt average shareholders, sources said.
Since New York Atty. Gen. Eliot Spitzer unveiled his probe of alleged widespread trading abuses in the fund industry, three people, including a former executive at Fred Alger Management Inc., have pleaded guilty to felony charges, and employees at more than 20 firms have come under investigation.
Federal prosecutors in Massachusetts have convened a grand jury to investigate brokerage Prudential Financial Inc., and the U.S. attorney in Houston reportedly is looking at trading involving AIM Inc.’s Invesco Funds unit. Invesco has denied any wrongdoing.
Northern California prosecutors, who started issuing subpoenas in late October, are seeking trading records, internal e-mails and written correspondence with investors and record keepers or other intermediaries, sources said.
The U.S. attorney’s office declined to comment on the probe Friday. Said Patrick D. Robbins, head of the securities fraud division, “This office doesn’t confirm whether a grand jury investigation exists or doesn’t exist.”
Fund companies also were reluctant to discuss the probe.
On its website, San Mateo-based Franklin Resources Inc. said that it had “received requests and subpoenas from various government agencies, including the SEC, for information relating to market timing and late trading” and that it had been cooperating.
Charles Schwab Corp. spokesman Lance Berg said he was “unable to confirm or deny” whether the San Francisco brokerage received a subpoena from the U.S. attorney. Schwab acknowledged last month that it uncovered timing arrangements with professional investors at its U.S. Trust unit and fired two workers who deleted e-mails related to that investigation.
Fremont Funds spokesman Brian Maddox said he could not confirm whether the San Francisco firm had been subpoenaed.
Dodge & Cox said on its Web site that it had been subpoenaed by the U.S. attorney.
“We will, of course, respond to this request,” the firm said. “Dodge & Cox Funds are presently not aware of any exceptions having been made with respect to our market timing or late trading policies and procedures.”
Federal prosecutors in Los Angeles have been working with the SEC to investigate funds but haven’t issued any subpoenas. “My guess is it won’t become a criminal matter here, based on what I’ve seen so far,” a knowledgeable source said.
Market timing, or rapid trading of fund shares, is not necessarily illegal, although most funds discourage the practice.
Late trading, or buying and selling fund shares after the stock market’s 4 p.m. Eastern time close but receiving that day’s price rather than the next day’s closing price, is illegal.
Times staff writer E. Scott Reckard contributed to this report, and Bloomberg News was used in compiling it.
