Fremont Investment Advisors of San Francisco has agreed to pay $2.1 million in restitution and $2 million in civil penalties to end a mutual fund market-timing case, New York Atty. Gen. Eliot Spitzer said Thursday.
Fremont was accused by the Securities and Exchange Commission and Spitzer of allowing market timing and late trading of its mutual funds to benefit a few select clients at the expense of most investors, Spitzer said.
Market timing is a type of rapid, in-and-out trading of mutual funds that can skim profits from long-term fund shareholders.
Late trading allows select investors to buy and sell funds at that day’s prices well after the close of the markets. That could let them profit from market-moving news that developed after the markets had closed.
In addition to the payments, Fremont also agreed to what Spitzer called enhanced ethics and compliance controls. Fremont neither admitted nor denied Spitzer’s findings.
“Fremont Investment Advisors and our employees are committed to upholding the funds’ policies to prevent market timing and late trading,” said Douglas Taylor, the company’s chief executive.
He said no employees or portfolio managers were involved in market timing for their own accounts. New policies to protect shareholders were adopted this year, he said.
Spitzer said Fremont allowed the improper trading while stating in its prospectus that it “does not permit excessive short-term trading, or other abusive trading practices.”
He said Fremont allowed preferred investors to do improper, short-term trading of shares of its Fremont Global Fund and U.S. Micro-Cap Fund at the expense of other shareholders. In one agreement,
Fremont allowed an investor to engage in market timing as long as an investment was made in Fremont’s New Era Value Fund and kept there to boost that fund’s size, Spitzer said.
“The lesson from this long-running investigation is that you must not have one set of rules for privileged insiders and another set for everyday investors,” Spitzer said. “The mutual fund industry will only regain the public’s trust when it treats everyone fairly and with respect.”
The settlement stems from Spitzer’s investigation of Canary Capital Partners.
Canary Capital and its founder agreed last year to pay $40 million to settle Spitzer’s charges that the hedge fund had engaged in market timing and the illegal late trading of mutual funds.
The Fremont settlement, expected to be final in a few months, will allow Affiliated Managers Group to acquire the Fremont Funds operation, according to Fremont Investment’s statement.