Updated from Nov. 24
Invesco acknowledged late Monday that it allowed market-timing activity with some of its funds and that the firm's parent,
, faces civil fraud charges by the
Securities and Exchange Commission
and New York Attorney General Eliot Spitzer's office.
The disclosure, posted on the firm's
, comes in the face of mounting allegations about its funds. The firm was among the first to be issued a subpoena by Spitzer's office. (
An Oct. 30 article by
raised red flags about several Invesco funds.)
According to several sources familiar with the matter, Invesco entered into market-timing relationships with several hedge fund firms, including Canary Capital Partners.
When questioned about Invesco's arrangements with specific hedge funds, Invesco spokesman David Bachert said, "Our company policy precludes us from disclosing client names and specifics of business dealings." The firm's release acknowledges that market-timing arrangements took place, but Invesco declined to mention the hedge funds involved or which funds were allowed to be timed. The statement also defended the market-timing arrangements as in the best interests of all of its fund investors.
Russ Kinnel, director of research at Morningstar, said, "It's an unusual release. Rather than saying, 'Timing happened and we regret it,' it's kind of a new tack." He added, "If you argue that you were doing this in shareholder interest, you have a pretty big burden of proof."
Invesco also said that based on its internal investigation, the firm has never knowingly permitted late trading. Further, Invesco has policies in place to detect harmful personal trading by portfolio managers and to prevent the "inappropriate distribution of confidential information regarding fund portfolio holdings," the statement said, adding, "our internal review has found that these policies have been effective."
An individual familiar with Spitzer's investigation confirmed that charges against Invesco, while not finalized or likely to come this week, would likely be civil and not criminal.
The defense of its market-timing arrangements and the reassurance that no late-trading knowingly transpired met with a positive response among analysts and investors. A Deutsche Bank analyst upgraded the stock to hold from sell, and its shares in London rose 7.5%.
In acknowledging its market-timing relationships, Invesco said it decided it could "better control certain asset allocators and momentum investors by restricting them to certain funds which, in its judgment, would not be adversely affected by their activities."
Invesco said Monday that "exceptions were made" to its prospectus guidlines on market timing. Invesco's current prospectus states that excessive short-term trading activity in the funds' shares "may hurt the long-term performance of certain funds," and details the tools in place to combat such trading.
Invesco also said that it has terminated trading privileges for "clients representing over $500 million in assets" during the past 12 months. The firm didn't say how long it had allowed the market-timing relationships.
Based on its review, Invesco said it continues "to believe that the actions taken by our funds have been consistent at all times with the best interests of fund shareholders."