Updated from 3 p.m. EST
Securities and Exchange Commission and the office of New York Attorney General Eliot Spitzer charged Invesco and its chief executive, Raymond R. Cunningham, with civil securities fraud Tuesday, alleging that the mutual fund firm allowed several hedge funds to make improper trades in breach of the firm's fiduciary duty.
The SEC and Spitzer's office say Invesco "fraudulently accepted investments by dozens of market-timers in Invesco mutual funds" to enhance its management fees. In doing so, Invesco violated its market-timing policies as stated in its prospectuses, the complaint said.
Invesco and Cunningham "willingly sacrificed the interests of mutual fund shareholders when market-timers dangled the prospect of higher management fees in front of them," said Stephen Cutler, the director of the SEC's enforcement division. "By granting special trading privileges to selected customers, they readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds' prospectus disclosures on market-timing."
Invesco, a Denver-based unit of the United Kingdom's
, wasn't immediately available for comment. The charges have been expected for weeks and Invesco has said it will vigorously defend its actions.
reported in October that five Invesco funds
turned up near the top of a list of funds with red flags for excessively high trading levels. The Spitzer complaint alleged that Canary Capital Partners --¿the New Jersey hedge fund that reached a $40 million settlement with Spitzer over its abusive trading of four fund firms --¿was among the hedge funds that was allowed to market-time Invesco's funds, confirming
in TheStreet.com last week. ¿
The complaint alleged that from at least July 2001 to October 2003, Invesco entered into arrangements the firm called "special situations" that allowed particular investors to market-time Invesco funds. These deals were kept secret from Invesco's independent board members and the funds' other investors. Invesco accepted these market-timing deals "with knowledge that they would be detrimental to long-term shareholders in the mutual funds," the complaint said.
Spitzer and the SEC's complaint put the damages from the market-timing arrangements at $160.8 million -- the fees that Invesco collected from unwitting long-term investors in the funds Invesco had turned over to timers. That total didn't include dilution and other costs associated with timing.
Invesco's prospectuses have long stated that the firm allowed up to four exchanges in to and out of funds in a given year -- and that exceptions would only be allowed if it met the best interests of the funds. In late November, Invesco acknowledged that "exceptions were made" to its market-timing policies, but defended the deals as in the best interests of all shareholders. The complaint alleges that Invesco fraudulently misled investors by "using the prospectuses that contained false market-timing policy." ¿