Heartland Advisors Execs Hit With SEC Fraud Complaint

Securities regulators on Thursday filed civil fraud charges against Heartland Advisors and most of its top executives, about two years after regulators placed two of its junk bond funds into receivership.

The Securities and Exchange Commission, in a complaint filed in federal court in Chicago, charged Heartland Advisors and eight current and former fund officers with deliberately mispricing assets in the high-yield bond funds.

Investors in the bond funds, which are being liquidated by a court-appointed receiver, lost $93 million because of the fraudulent pricing scheme. The SEC alleges Heartland executives began overstating the value of the funds in March 2000 and continued up until March 2001, even after Heartland was forced to twice "radically devalue the bonds" in its portfolio.

One of those charged by regulators is William Nasgovitz, president and chief executives officer, of the Milwaukee-based firm, which also manages three stock mutual funds.

The SEC alleges that Nasgovitz, along with three other Heartland officers and a personal friend of Nasgovitz's, engaged in illegal insider trading. Regulators contend the five individuals sold shares in the two bond funds during the scheme.

"The fraud in this case touched all levels of the operations of these mutual funds and two areas critical to investor confidence, disclosure and pricing,'' said Mary Keefe, the SEC's Midwest regional director.

The action against Heartland comes at a time when the mutual fund industry has been under fire over allegations of improper trading by a group of hedge funds in mutual fund shares. While the charges against Heartland are of a different nature, they illustrate that there's a lot of potential for wrongdoing in the once scandal-free mutual fund industry.

The issue of mispricing bonds also has been a problem for hedge funds the past few years. The SEC last year brought an enforcement action against Beacon Hill Asset Management, claiming the hedge fund misled investors about how it lost an estimated $400 million in the mortgage-backed securities market. In October, federal prosecutors filed fraud charges against the former portfolio manager for Kenneth Lipper's now-defunct convertible bond hedge fund. Recently, there have been allegations that the Clinton Group, another big hedge fund, may have played fast-and-loose with the valuations of its asset-backed securities portfolio.