Janus' $150 Billion Problem

Investors in Janus(JNS) funds who have stuck with the firm through thick and thin have been repaid with the double blow of injury and now insult.

First, Janus' dangerous concentration in tech and telecom companies resulted in brutal losses after the bubble burst in 2000. Second, as we learned Wednesday, Janus was allegedly among the bad apples that allowed hedge funds to reap huge profits through illegal arbitrage strategies with the funds, at the expense of the fund holders who remained invested in Janus after the bubble burst.

Here's what Janus did, according to the complaint filed by New York Attorney General Eliot Spitzer's office. In the spring of 2002, Janus gave hedge fund Canary Partners permission to time the Janus Mercury fund, in exchange for Canary's socking away money into a Janus money-market fund. Canary made big profits timing the Mercury fund at the expense of individual investors in the fund. When Canary sought to expand its market-timing capacity in Janus' offshore funds, an employee at the Denver-based fund shop sent concerned emails to Janus Interntional CEO Richard Garland about the volume of market activity. "We need to keep our funds clean," the emailer wrote to Garland.

Garland replied, "I have no interest in building a business around market timers, but at the same time I do not want to turn away $10-$20m!" After learning that the deal could bring in as much as $50 million, Garland gave the go-ahead for additional market-timing capacity on April 3, 2003. The new deal was never finalized. Janus's prospectuses did not disclose the market-timing activity; in fact, the firm's language made it sound as though it policed would-be market timers in its funds.

One can spin an ill-advised investment strategy that led to overexposure in stocks such as Nokia(NOK), Cisco(CSCO) and AOL Time Warner(AOL). Heck, a lot of people drank the Kool-Aid back in 1999; Janus just had seconds. However, there is no spinning this week's news, if the very convincing 44 pages of allegations prove true: Janus demonstrated that it would breach fiduciary responsibility for the right price. There are questionable fund-industry practices that firms can rightly, if cravenly, defend by saying "everybody does it," but this does not appear to be one of them.