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Alliance Suspends Tech Fund Manager Amid Spitzer Probe

One of the biggest and oldest tech funds is the latest target in the unfolding fund scandal.

Updated from 11:30 a.m.

Add another fund family to the list of scandal-tainted firms:

Alliance Capital

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. And apparently, add a new type of participant: the portfolio manager.

The New York asset-management firm suspended a portfolio manager of its $3.3 billion

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AllianceBernstein Technology fund after the company was contacted by the offices of New York Attorney General Eliot Spitzer and the

Securities and Exchange Commission

in their probe of mutual fund trading practices.

Alliance also suspended a salesman in its hedge fund division after an internal investigation identified "conflicts of interest in connection with certain market-timing transactions." Alliance said it was cooperating with the attorney general and the SEC investigation.

Alliance, which hadn't previously been mentioned in connection with Spitzer's probe into the trading relationships between mutual and hedge funds, formed a special committee of directors to run a "comprehensive review of the facts and circumstances relevant to the SEC's and the

New York attorney general's investigations."

"What's interesting is the fund manager's apparent involvement -- Spitzer's releases so far have shown that portfolio managers are reluctant or unwitting participants," said Mercer Bullard, securities law professor at the University of Mississippi at Oxford and founder of investor advocacy group Fund Democracy.

The New York attorney general's office declined to comment on Alliance's action. Officials at Alliance said they couldn't elaborate beyond Tuesday's news release because of the continuing investigation -- including more details on the portfolio manager in question. However, the only portfolio manager listed in all of the fund's literature is Gerald Malone, who has been with the fund since 1992 and has been sole manager since Peter Anastos left in January 2002. Malone also manages tech hedge funds for Alliance Capital. (Andrew Frank is assistant portfolio manager.) The news release didn't say if the portfolio manager under suspension merely knew of any market-timing arrangements or was an active participant in the scheme.

Fund managers get compensated in different ways. Performance-based compensation is common; others also get compensated for assets under management. "A manager may be compensated by bringing in hot money from hedge funds looking to market-time," Bullard said. "If the only impact on the fund is to increase its expenses, which benefits the fund, then it's a collateral benefit to entertain market timers and late traders."

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The AllianceBernstein Technology fund is one of the biggest, oldest and more conservative-oriented technology funds in the fund world. Malone's 11-year tenure at the helm is longer than most tech funds' lifetime -- the Alliance tech fund was first offered in 1982. While the fund's tech focus has meant a volatile ride, Malone has veered toward more "safe tech" offerings: The fund's top four holdings are

Microsoft

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,

Intel

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,

Dell

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and

Cisco Systems

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, according to the most recent holdings provided by Alliance.

The fund's three-year average annual loss of 27.3% ranks it in the top 29% of all tech funds, while its 10-year average annual return of 11.43% ranks it in the top 47%, according to Morningstar.

Fund Democracy's Bullard applauded Alliance for quickly disclosing the information. "At least we're hearing from Alliance and not from Spitzer," he said. However, Bullard, a former SEC attorney, took exception with the news that Alliance's board of directors authorized a panel of audit committee and independent board members to spearhead the investigation into any potential abuses.

The time for Alliance insiders to investigate was before Spitzer's probe, Bullard said. "They should be looking to someone else to conduct the investigation; otherwise it's like the foxes looking after the foxes," Bullard said. "It's a cover-up strategy to have the independent directors and audit committee lead the investigation, because they missed it the first time."

Before Tuesday, Spitzer's probe had been known publicly to focus on four companies with big mutual fund segments:

Bank of America

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,

Bank One

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,

Janus

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and

Strong

. The investigation came to light when Spitzer's office announced a $40 million settlement with hedge fund adviser Canary Capital.

To date, only Bank of America broker Theodore Sihpol has been charged with a crime in the investigation, which focused on mutual fund companies facilitating late trading and market timing by hedge funds.

Late trading is when a fund buyer is allowed to purchase a fund after it settles at its 4 p.m. closing price, allowing the buyer to take advantage of subsequent changes in component prices. Market timing, a slightly less serious offense, involves dipping in and out of mutual fund shares to exploit pricing misalignments in different asset markets.

Alliance's announcement is the latest ripple from the tidal wave of bad news for the mutual fund industry after Spitzer alleged that four fund firms helped a New Jersey hedge fund engage in illegal trading of fund shares. With Spitzer off to a fast start, other regulators and industry officials are running to catch up.

In prepared testimony for the Senate Banking Committee Tuesday, SEC Chairman William Donaldson said the commission is investigating allegations of illegal late trading and market timing in funds. "We will aggressively pursue those who have injured investors as a result of illegal late-trading and/or market-timing activity," Donaldson said.

Meanwhile, the fund-industry trade group Investment Company Institute plans to approach the issue Friday as its board of industry executives meets for its regular session. "The allegations will definitely be on the agenda," said Chris Wloszczyna, a spokesman for ICI. The spokesman said the organization is committed to making immediate and substantial action. "It will not be a blue-ribbon panel kind of thing -- time is of the essence. We have a fairly short lead time to address this issue," Wloszczyna said.