SEC Plans Civil Charges Against Alliance Capital

The company is under fire for failing to stop improper trading in some of its mutual funds.
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The mutual fund trading scandal keeps rolling along, with

Alliance Capital Management

(AC) - Get Report

becoming the latest firm on the firing line.

The giant financial services firm confirmed Thursday that the

Securities and Exchange Commission

intends to file civil charges against the company because it failed to stop improper trading in some of its mutual funds. The SEC notified Alliance, based in New York, of its intentions last Friday.

New York Attorney General Eliot Spitzer, whose office is working in tandem with the SEC on the mutual fund investigation, also is likely to file charges against Alliance.

Regulators haven't yet identified which funds the illegal trading tookplace in. But George Malone, one of two employees suspended recently by Alliance for "inappropriate conduct with regard to market-timing," managed the

AllianceBernstein Technology Fund

(ALTFX) - Get Report

.

The AllianceBernstein funds are just one part of Alliance's financial-services empire. The company, which also operates the Sanford Bernsteinresearch outfit, has more than $400 billion in assets.

Alliance appears headed to become the second financial services firm to be charged with civil fraud in the mutual fund investigation. Last week, the SEC and Massachusetts regulators filed civil fraud charges against Boston-based

Putnam Investments

. Regulators contend the

Marsh & McLennan

(MMC) - Get Report

subsidiary failed to disclose that two of its managers "engaged in excessive short-term trading of Putnam mutual funds" for their own benefit.

In the coming days, other firms that could face either civil or criminal charges in the investigation are

Security Trust

, a Phoenix-based trust bank, and

Strong Capital Management

. Over the past few weeks, the top executives at Strong, Putnam and Security Trust all have been forced to resign because of the scandal plaguing the $7 trillion mutual fund industry.

Lawyers for Security Trust are meeting with prosecutors from Spitzer's office Thursday in a bid to stave off the filing of criminal charges against the trust bank.

The wide-ranging investigation is focusing mainly on hedge fund traders, mutual fund managers and brokers who helped arrange trades.

Alliance issued a press release commenting on the investigations, following several news reports saying regulators were likely to file civil fraud charges against the firm in the coming days.

Shares of Alliance fell 60 cents, or nearly 2% in midday trading, to $30.51. The stock has fallen 11% since the first news report that investigators were closing in on Alliance.

Securities regulators say they have gathered evidence that Alliance failed to stop traders from engaging in market-timing, an arbitrage strategy in which time differences between the closing of U.S. and foreign exchanges are exploited. While market-timing is technically legal, most mutual funds say they prohibit it because the rapid in-and-out trading can dilute the value of a fund's holdings and hurt other investors.

Several news reports said investigators believe Alliance permitted traders to engage in market-timing, if they agreed to invest money in several Alliance-sponsored hedge funds.

It's been no secret that regulators are looking into allegations of market-timing at Alliance. In September, the firm suspended two employees for inappropriate market-timing.

Alliance said its internal investigation had found "these market-timing transactions had an adverse effect on mutual fund shareholders."

Market-timing is just one of the trading improprieties being investigated. Regulators also are looking into allegations of late trading, an illegal activity in which favored customers are allowed to buy mutual funds that were priced prior to the release of market-moving news.

So far, Spitzer's office has won two criminal convictions in the mutual fund trading investigation, stemming from allegations of late trading. A third person, a former

Bank of America

(BAC) - Get Report

broker, has pleaded not guilty to fraud charges involving allegations of late trading.