MFS Joins Market-Timing Casualty List
Updated from 4:15 p.m. EST
Massachusetts Financial Services agreed to pay a $225 million penalty and suspend its two top executives as part of a complex deal with state and federal regulators looking into improper trading in the company's mutual funds.
The deal imposes a temporary suspension on MFS Chief Executive John Ballen and Chief Investment Officer Kevin Parke and orders the company to reimburse its shareholders for losses sustained through the improper trading.
The agreement requires Massachusetts Financial Services Co. to pay $175 million in restitution to injured investors, cut its management fees by an estimated $125 million over the next five years and pay a penalty of $50 million. Ballen and Parke have agreed with the
Securities and Exchange Commission
to suspensions for nine and six months, respectively, and have each agreed to pay approximately $315,000 in fines and restitution.
The settlement with the SEC and state regulators from New York and New Hampshire comes after investigators found that 11 of the company's mutual funds were open to market-timers despite the firm's claims to the contrary.
"This settlement levels the playing field for all investors in this mutual fund company," said New York Attorney General Eliot Spitzer, whose office had insisted on the fee reduction. "From now on, market timers will no longer be permitted to profit at the expense of long-term investors."
The settlement had been in the works for weeks, with much of the delay due to the SEC's insistence that MFS's top two managers agree to the suspension. In fact,
Sun Life Financial
(SLF) - Get Report
, the parent company of Boston-based MFS, took a $211 million charge in the fourth quarter to cover the cost of a potential deal.
MFS, which operates 140 mutual funds, claims to be the nation's oldest mutual fund company.
Market-timing is the term for a legal but frowned-upon trading strategy in which mutual fund shares are bought and sold frequently in order to profit from price differences in different markets. It's harmful for the vast majority of mutual fund investors because it can dilute the value of a fund by driving up trading and administrative costs.
Most fund companies say they try to ferret out and stop market-timers. But investigators looking into improper trading practices in the $7 trillion mutual fund industry have found that many fund companies were willing to bend or ignore those rules when it came to a privileged group of hedge funds and their brokers.
MFS is the third major fund company to reach a settlement with regulators in the wide-ranging investigation mutual funds.
Last November,
Putnam Investment
, a division of
Marsh & McLennan
(MMC) - Get Report
, reached a partial settlement with the SEC after it was revealed that the firm failed to prevent two of its managers from engaging in excessive short-term trading of Putnam mutual funds for their own benefit. The scandal led to the ouster of Putnam's longtime president, Lawrence Lasser.
A month later
Alliance Capital
(AC) - Get Report
agreed to pay a $250 million to settle fraud claims and cut its fees by $350 million.
Like MFS, Alliance allowed investors and hedge funds to market time its funds. In fact, both Alliance and MFS struck a deal with Daniel Calugar, a lawyer and former Las Vegas brokerage executive, who has emerged as one of the biggest market-timing traders in the scandal. The SEC, in a separate action in December, charged Calugar and his Security Brokerage outfit with generating $175 million in profits from market-timing shares of funds sold by Alliance and MFS.
Robert Manning, MFS' new chief executive and chief investment officer, said: "My first priority as CEO will be to talk to our clients, investors and employees to listen to their concerns, answer their questions, and explain to them how we intend to set the highest standards in our industry in our policies and practices."
As part of the agreement, MFS will hire an independent compliance consultant to review all of its procedures and search for any potential conflicts of interest. And beginning in 2006,must submit every other year to an outside review by an independent third party consultant.