SEC Suspends 2 Fund Officers, Fines Company
For the first time in their five-month crackdown on mutual funds, regulators Thursday forced changes in an executive suite as industry pioneer Massachusetts Financial Services Inc.’s two top officers accepted suspensions and the firm agreed to $350 million in penalties and fee cuts to settle charges of widespread market timing.
MFS Chief Executive John W. Ballen and Kevin R. Parke, the firm’s president, were barred from serving as officers or directors in the mutual fund industry for three years, the Securities and Exchange Commission said. In addition, the SEC suspended Ballen from working at MFS or elsewhere in the fund industry for nine months. Parke was suspended for six months.
Ballen and Parke, neither of whom could be reached for comment, also agreed to pay $315,000 in fines and restitution. Analysts said it was unlikely that either would return to MFS.
The deal settles charges against Boston-based MFS, the nation’s oldest mutual fund company and the 10th largest in assets, brought by the SEC and the states of New York and New Hampshire. Regulators said the firm allowed rapid in-and-out trading in its funds despite clear language in its prospectuses barring the activity.
Securities lawyers said the suspensions should send a strong message to the nation’s $7.4-trillion fund industry.
“The settlement tells every CEO, from [Fidelity’s] Ned Johnson on the East Coast to [Franklin’s] Chuck Johnson on the West Coast, that, ‘Hey, if I sign a fund registration statement and allow improper activity to occur, even if I don’t know about it specifically, I can be removed,’ ” said Julie Allecta of Paul, Hastings, Janofsky & Walker in San Francisco, which represents several fund companies but not MFS.
“Whether the suspension is one day, one year or 10 years,” Allecta added, “the stigma is severe.”
MFS, which neither admitted nor denied wrongdoing, will pay $175 million in restitution to investors and a penalty of $50 million, plus reduce its management fees by $125 million over the next five years. MFS also agreed to governance changes, including hiring a senior executive who is supposed to ensure that management fees charged to the funds are “reasonable” and negotiated at “arms length.”
Donald Stewart, chief executive of MFS’ Toronto-based parent, Sun Life Financial Inc., welcomed the deal after months of speculation about the probe. “We are pleased to have reached an agreement with the regulators that will resolve these issues, fully reimburse affected MFS fund investors, and protect the interests of Sun Life Financial shareholders,” Stewart said.
MFS named an insider, Robert J. Manning, as chief executive, president and chief investment officer.
“My first priority as CEO will be to talk to our clients, investors and employees to listen to their concerns, answer their questions and explain to them how we intend to set the highest standards in our industry,” said Manning, who joined MFS as an analyst in 1984 and most recently headed its bond investing group.
Given the $140-billion asset base of MFS, Allecta called the fines “substantial but far from draconian. This was carefully crafted.”
MFS is the second fund company to be heavily fined in the government’s probe of trading and sales practices. Rival Alliance Capital Management was the first to be slapped with financial penalties, agreeing in December to $600 million in fines and fee cuts to settle charges of improper trading.
Market timing is the nickname for rapid buying and selling of fund shares by favored traders. Such trading hurts long-term holders by diluting a fund’s value and raising transaction costs, prosecutors say.
From late 1999 to 2003, several MFS funds were “heavily timed,” according to New York Atty. Gen. Eliot Spitzer, who first shined a spotlight on the industry in September by alleging widespread trading abuses. Ten of MFS’ 140 funds were timed, he said, including MFS Emerging Growth, which was managed directly by Ballen.
Although this is the first instance in the fund probe in which the SEC has insisted on management changes, several executives have been ousted by scandal-tainted fund companies.
Putnam Investments replaced its CEO, Lawrence Lasser, in November amid allegations of market timing by several of the firm’s own portfolio managers.
Also let go in recent months: John Carifa, president of Alliance Capital Management; Robert Gordon, head of Bank of America Corp.’s mutual fund group; Pilgrim Baxter & Associates Ltd. co-founders Gary Pilgrim and Harold Baxter; Strong Capital Management Inc. founder and CEO Richard Strong; and James Connelly, former vice chairman of Fred Alger Asset Management Inc., who was sentenced to up to three years in prison for concealing evidence of trading abuses.
