Federated, Bank One Make New Fund Disclosures - TheStreet

Updated from 7:50 a.m. EST

Federated Investors

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said an internal investigation found that customers managed to both late-trade and market-time the company's mutual funds over the last several years, and said the practice was in some cases allowed by employees who didn't know what was going on.

Fifteen of the late trades were made by one hedge fund, Veras Partners, since January 2000. About 100 improper trades were booked in all, with an average size of roughly $28,000. While Federated, which with $200 billion in assets is one of the country's biggest money managers, doesn't think its employees had formal agreements in place to facilitate the practice, at least one has been fired for trying to delete emails sought in the probe.

Federated said Veras' trades were "accepted by a group of employees who did not have a sufficient understanding of the circumstances under which trades could be processed after 4 p.m."

Late-trading in mutual funds is an illegal practice that involves buying shares at prices that were set prior to the disclosure of market-moving news. It has been at the center of a 2-month-old probe by state and federal prosecutors led by New York Attorney General Eliot Spitzer, who shook the once-sleepy mutual fund world in early September by settling allegations of improper trading with hedge fund Canary Capital Partners for $40 million.

Canary figures into the other prong of Federated's probe of a legal but widely discouraged method of gaming the mutual fund pricing mechanism called market-timing. The company said it found "a few instances" in which its employees had arrangements with clients to permit the practice, which involves rapid-fire buying and selling of shares to capitalize on discrepancies in different stock markets.

"One of these arrangements involved Canary Capital Partners LLC or other related entities," Federated said. The company said one of its national brokerage firm clients introduced Canary to two Federated sales representatives, between which a meeting was held "to discuss the size and frequency of trades that Federated would permit in its funds," it said.

"The Federated representatives made clear from the outset that no frequent trading would be permitted in any international funds. Ultimately, the Federated representatives told

Canary that Federated would permit some trading in domestic equity funds, as long as the trading was limited in frequency and scope. These limitations were intended to avoid detriment to the domestic equity funds at issue," Federated said.

Veras also market-timed Federated funds for a profit of $175,000 on $12 million of invested capital, the company said. Federated's shares closed Tuesday at $28.34, about 50 cents below their 52-week high.

Meanwhile,

Bank One

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said late Wednesday that it has been told by regulators "to anticipate enforcement action" over its involvement in the mutual fund trading scandal. The Chicago-based bank's mutual fund business was implicated early on in the fast-growing scandal that has rocked the $7 trillion mutual fund industry. Back in September, Bank One was identified by New York Attorney General Eliot Spitzer as one of several firms that permitted hedge funds to make improper trades in shares of its mutual funds.

Bank One, about a month ago, fired a number of employees over the incident. In a regulatory filing, the bank said it hopes to reach an "amicable resolution with the regulators" to avoid litigation.