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SEC Fines Van Kampen for Misleading Investors

Michael Brick

At the end of December 1996, Van Kampen Investment Advisory prepared to offer investors what seemed like a tantalizing gift. The company's incubator fund had achieved a stunning 63% return for 1996, and soon the public could have a piece.

It wasn't Christmas after all.

Not only were the returns unsustainable for the firm's (VGRBX)Van Kampen Growth fund, but also the fund's managers knew the early returns were heavily based on investments in unpredictable initial public offerings, the Securities and Exchange Commission now says. Yet they declined to warn investors, the agency adds. In an administrative proceeding disclosed Wednesday, the SEC says that Van Kampen and a former official agreed to pay fines for misleading investors, the first ever levied against an incubator fund, the agency says.

The fund, initially capitalized with $1.2 million in assets from the fund company, advertised a 63% gain for 1996, more than 20 percentage points above its closest competitor at the time. More than 14,800 investors plunged in, pouring $109 million into the fund during its limited public run from Feb. 3 to March 14, 1997.

While neither admitting nor denying wrongdoing, Van Kampen agreed to pay a $100,000 fine and its former chief investment officer, Alan Sachtleben, agreed to pay $25,000. Company officials and Sachtleben couldn't be reached to comment.

For three years the SEC has been warning incubator fund managers to disclose the impact on their funds of the bottle-rocket Internet stocks. The Van Kampen Growth fund's performance was largely due to the outsized gains from investments in the initial public offerings of a few Internet companies, the SEC says. And that performance could never have been sustained, the SEC says. Last year, the fund had a 22% return and through Aug. 31 it's up 6.3%, according to Morningstar.

In handing down the fines, the SEC noted that company officials received a copy of a Dec. 31, 1996 TheStreet.com article that raised questions about whether the fund's performance depended on IPOs. After reading the story, Sachtleben commissioned an internal study, which determined that IPOs were responsible for more than 30% of Growth's stellar return. Knowing the fund would soon go public, he ignored the findings and didn't tell the fund's trustees or senior Van Kampen officials, according to the SEC.

"You can not unreasonably raise shareholder expectations by not telling the full story," says the SEC's James Davidson. Officials say there was little investors could have done to protect themselves because information on the investments was withheld.