Securities regulators on Thursday filed civil fraud charges against
and most of its top executives, about two years after regulators placed two of its junk bond funds into receivership.
Securities and Exchange Commission
, in a complaint filed in federal court in Chicago, charged Heartland Advisors and eight current and former fund officers with deliberately mispricing assets in the high-yield bond funds.
Investors in the bond funds, which are being liquidated by a court-appointed receiver, lost $93 million because of the fraudulent pricing scheme. The SEC alleges Heartland executives began overstating the value of the funds in March 2000 and continued up until March 2001, even after Heartland was forced to twice "radically devalue the bonds" in its portfolio.
One of those charged by regulators is William Nasgovitz, president and chief executives officer, of the Milwaukee-based firm, which also manages three stock mutual funds.
The SEC alleges that Nasgovitz, along with three other Heartland officers and a personal friend of Nasgovitz's, engaged in illegal insider trading. Regulators contend the five individuals sold shares in the two bond funds during the scheme.
"The fraud in this case touched all levels of the operations of these mutual funds and two areas critical to investor confidence, disclosure and pricing,'' said Mary Keefe, the SEC's Midwest regional director.
The action against Heartland comes at a time when the mutual fund industry has been under fire over allegations of improper trading by a group of hedge funds in mutual fund shares. While the charges against Heartland are of a different nature, they illustrate that there's a lot of potential for wrongdoing in the once scandal-free mutual fund industry.
The issue of mispricing bonds also has been a problem for hedge funds the past few years. The SEC last year brought an enforcement action against
Beacon Hill Asset Management
, claiming the hedge fund misled investors about how it lost an estimated $400 million in the mortgage-backed securities market. In October, federal prosecutors filed fraud charges against the former portfolio manager for Kenneth Lipper's now-defunct convertible bond hedge fund. Recently, there have been allegations that the
, another big hedge fund, may have played fast-and-loose with the valuations of its asset-backed securities portfolio.
A spokesman for Heartland declined to comment on the charges. Nasgovitz's attorney could not be reached for comment.
Besides Nasgovitz, the other senior Heartland executives charged by the SEC are Paul Beste, the firm's chief operating officer; Jilaine Bauer, its general counsel; Kevin Clark, a senior vice president; and Kenneth Della, the firm's treasurer. Also charged were former portfolio managers Thomas Conlin and Greg Winston and Raymond Krueger, a friend of Nasgovitz's.
Additionally, the SEC filed an administrative order against four of the fund's independent directors, charging them with being negligent in monitoring the two bond funds. The directors, in neither admitting nor denying the allegations, agreed to "cease and desist'' from causing future securities violations.
The SEC also ordered FT Interactive Data, a bond pricing service, to pay a $125,000 for aiding and abetting Heartland. The company is partially owned by the
. The company was unavailable for comment.
The mispricing scheme at Heartland led to a flurry of investor lawsuits. So far, the court-appointed receiver has handed out about $22 million of the assets in the funds to the investors.
But an SEC official said the receiver is having a difficult time selling some of the bonds, since many of them are now essentially worthless.