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Alliance Agrees to Settle Charges With SEC, Spitzer

The firm will pay $250 million to settle fraud claims and will cut fees by $350 million.

Updated from 12:47 p.m. EST

Alliance Capital Management

(AC) - Get Associated Capital Group, Inc. Class A Report

will pay $250 million to settle claims that it defrauded mutual fund investors by allowing market timing in a number of its funds, the

Securities and Exchange Commission

said Thursday.

Separately, in a settlement with New York Attorney General Eliot Spitzer, Alliance agreed to reduce its fees by $70 million annually over five years, for a total of $350 million.

The SEC said the $250 million settlement will be distributed to the shareholders harmed by Alliance's market-timing arrangements.

"Alliance Capital violated the first rule for investment advisers -- to protect the interests of the client," said Stephen M. Cutler, director of the SEC's division of enforcement. "A violation of this fundamental trust warrants a most severe sanction, and the SEC's order reflects that. The size of the payment -- the largest ever by a mutual fund adviser -- also ensures full compensation to investors injured by these timing arrangements."

The SEC settlement doesn't require Alliance to reduce its fees for mutual fund customers, but the company must make sweeping compliance and fund governance reforms, the SEC said.

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Among the SEC's factual findings were:

At its height in 2003, Alliance arranged more than $600 million in market-timing in its mutual funds.

Alliance provided confidential information about the portfolio holdings of certain mutual funds to Canary Investment Management.

Alliance consented to the SEC's settlement without admitting or denying the SEC's findings.

Regarding the Spitzer and SEC settlements, Dan Culloton, an analyst at Morningstar, said, "We won't comment on the differences between the SEC and Eliot Spitzer, but from an investor standpoint, lower fees are better, and it adds to the impression that Alliance is putting the scandal behind them." Morningstar hasn't lifted its sell recommendation on AllianceBernstein funds.

Roy Weitz, founder of, a Web site for mutual fund investors, agrees. "What Spitzer did is totally appropriate. He is hitting fees as a punitive measure and essentially punishing Alliance for its overall conduct. Alliance was a high-priced provider to begin with, so even with a 20% haircut, it won't be a bargain. So in terms of giving them competitive advantage, it won't be an issue," Weitz said.

The Investment Company Institute, a fund industry trade group, took a different stance: "We think it is inappropriate for a single state to use an enforcement action to set fees," said Chris Wloszczyna, spokesman for the ICI. "That is a role that's appropriate for the SEC and Congress. We agree with the SEC's position that rules that are uniformly applicable to the entire industry are more desirable than a piecemeal approach that fragments the marketplace."

Spitzer defended his action, saying, "Funds that permitted their investors to be overcharged by affiliated management companies must be held financially accountable for that conduct. Requiring them to pay back those overcharges is not 'rate setting,' but merely returning to investors money that they nevershould have been charged in the first place."

Last month,

the whip came down on two high-level officials at Alliance, as the firm scrambled to address the abusive trading scandal. The company said at the time that John Carifa -- the firm's president and chief operating officer, as well as a director of the company and the chairman of a separate fund board -- had resigned, as had Michael Laughlin, chairman of Alliance's fund-distribution unit.

Alliance Chief Executive Lewis Sanders said at the time that he requested the resignations because the two executives "had both senior and direct responsibility over the firm's mutual fund unit, which, as previously reported, allowed inappropriate market-timing transactions, some of which had an adverse impact on mutual fund shareholders."