Janus Sets $31.5 Million Repayment to Investors

"Janus' initial 'everybody does it' defense left something to be desired," said Morningstar director of research Russ Kinnel, "but they have done a much better job lately in trying to restore investor confidence and improve its practices."

In addition to this morning's news release, Janus released a letter to shareholders from its independent trustees that detailed the extensive steps the firm has taken to prevent abusive trading and offer "greater transparency and accountability." Some of the measures have already been disclosed. On abusive trading, the trustees said Janus is improving internal controls over trading activity and tightening the language in its prospectuses regarding how it deters short-term trading. Janus has also increased redemption fees to 2% from 1% and has improved its method of "fair value" pricing its funds.

Beyond frequent trading, Janus said it is prohibiting the use of soft dollars -- which involves using brokerage commissions to purchase research, a legal and common practice that nonetheless is rife with conflicts of interest and typically increases the fees paid by investors. The fund industry has been pushing in recent weeks to curtail the use of soft dollars.

The $31.5 million total is "not too far off from what I would guess -- I had the impression that their market-timing deals were fairly small," said Morningstar's Kinnel. "I do like the changes they've made -- tightening up their prospectus, sounds like they're doing better with fair-value pricing, eliminating soft dollars. The settlement will obviously be the endgame."

Janus hasn't yet determined the best way to pay investors back, including whether the "mechanics of payment" will involve remuneration to the funds or to shareholders directly. The $31.5 million total, determined by an audit by Ernst & Young at the behest of Janus' independent trustees, includes: $22.8 million in net gains made by Canary and the other abusive traders; $2.7 million in "opportunity cost" lost to the funds because of the abusive traders' profits; $1 million in management fees Janus received related to the discretionary trading accounts; and $5 million in waived redemption fees, which allowed the market-timers to move in and out of the funds without penalty. Janus already made reserves for the latter two items in its third-quarter earnings; the first two items will result in a charge in the fourth quarter, "along with other investigation-related charges," the firm said.