Federated Investors Finds Possible Trading Breach

Federated Investors Inc., the fifth-largest publicly traded U.S. money manager, said Wednesday that an internal investigation turned up possible improper mutual fund trading. The stock fell 13%, the second-biggest drop since the company’s initial public offering in 1998.

Pittsburgh-based Federated uncovered instances in which orders for funds were accepted after the market closed at 4 p.m. Eastern time. The company also may have allowed “a few investors” to ignore a policy against frequent trading in return for deposits in other funds. Chief Executive Christopher Donahue declined to identify the clients or funds involved in the trading.

The trading abuses are at the heart of an inquiry by New York Atty. Gen. Eliot Spitzer and the Securities and Exchange Commission of the $7-trillion fund industry. Regulators are reviewing the trading practices of more than 20 firms, including Fidelity Investments. Spitzer has said illegal trades may have taken billions of dollars of profits from long-term fund investors.

“It appears that more mutual fund companies than we thought have been involved in late trading or lax efforts in reducing market timing that contradict what is written in their prospectuses,” said Ron Geffner, a former SEC enforcement attorney who’s now an attorney at Sadis & Goldberg in New York.

Shares of Federated tumbled $4.06 to $27.59 on the New York Stock Exchange.

Federated said it had been contacted by the SEC, Spitzer and the NASD, formerly the National Assn. of Securities Dealers. The company said it would improve enforcement procedures and repay any shareholders who lost money because of the trades. Donahue said it was too early to determine what the losses, if any, may have been. Federated spent $1.1 million on the probe in the third quarter.