said it would make $31.5 million in "restoration" payments to holders of the mutual funds in which the firm allowed improper trading, while rolling out several other initiatives to prevent future abusive trading.
Janus also said it appointed independent director and former
vice chairman Steve Scheid as chairman of Janus, effective Jan. 1. Previously, Janus CEO Mark Whiston was to succeed Landon Rowland as chairman.
Friday's announcement follows Janus' promise to "make whole" all investors who lost money because of its 12 "discretionary arrangements" with market-timers, and it continues Janus' push to restore investor confidence in the wake of the widening industry scandal. On Sept. 3, Janus was one of four fund firms named in New York Attorney General Eliot Spitzer's $40 million settlement with hedge fund Canary Capital Partners over Canary's improper arrangements with the firms.
The restoration payment is likely to be the first of Janus' payouts to resolve the abusive trading scandal. The fund family is embroiled in investigations by New York and Colorado's top securities regulators as well as the
Securities and Exchange Commission
. Janus said Friday that it is in talks with regulators to settle the charges, and that it expects the settlement would involve remedial actions as well as more monetary penalties.
"Today's announcement marks an important step in regaining the trust of our fund shareholders," said Janus CEO Mark Whiston. "Although there is still much work to be done, particularly with respect to resolving these matters with the regulators, the fund trustees and JCG's management team are working very hard to protect fund shareholders and deliver strong investment performance."
In the initial days after the Spitzer bombshell, the Denver-based fund shop partially defended its role in the abusive trading scandal as an industrywide situation, and that drew some criticism. More recently, Janus focused less on defending its actions and making a strong push to restore investor confidence. The push ranged from tangible measures such as increasing redemption fees and ending soft-dollar arrangements to such charm-offensive measures as posting testimonials from its fund managers on its Web site.
"Janus' initial 'everybody does it' defense left something to be desired," said Morningstar director of research Russ Kinnel, "but they have done a much better job lately in trying to restore investor confidence and improve its practices."
In addition to this morning's news release, Janus released a letter to shareholders from its independent trustees that detailed the extensive steps the firm has taken to prevent abusive trading and offer "greater transparency and accountability." Some of the measures have already been disclosed. On abusive trading, the trustees said Janus is improving internal controls over trading activity and tightening the language in its prospectuses regarding how it deters short-term trading. Janus has also increased redemption fees to 2% from 1% and has improved its method of "fair value" pricing its funds.
Beyond frequent trading, Janus said it is prohibiting the use of soft dollars -- which involves using brokerage commissions to purchase research, a legal and common practice that nonetheless is rife with conflicts of interest and typically increases the fees paid by investors. The fund industry has been
pushing in recent weeks to curtail the use of soft dollars.
The $31.5 million total is "not too far off from what I would guess -- I had the impression that their market-timing deals were fairly small," said Morningstar's Kinnel. "I do like the changes they've made -- tightening up their prospectus, sounds like they're doing better with fair-value pricing, eliminating soft dollars. The settlement will obviously be the endgame."
Janus hasn't yet determined the best way to pay investors back, including whether the "mechanics of payment" will involve remuneration to the funds or to shareholders directly. The $31.5 million total, determined by an audit by Ernst & Young at the behest of Janus' independent trustees, includes: $22.8 million in net gains made by Canary and the other abusive traders; $2.7 million in "opportunity cost" lost to the funds because of the abusive traders' profits; $1 million in management fees Janus received related to the discretionary trading accounts; and $5 million in waived redemption fees, which allowed the market-timers to move in and out of the funds without penalty. Janus already made reserves for the latter two items in its third-quarter earnings; the first two items will result in a charge in the fourth quarter, "along with other investigation-related charges," the firm said.
The board of fund directors announced other steps to shore up Janus' compliance procedures, including recommending an independent compliance officer. "These initiatives reflect our goal of adopting high standards of corporate governance," said Whiston.
Meanwhile, with the appointment of Scheid, Whiston waived his right to become chairman and forfeited a cash severance payment of $20 million to $23 million. Under his amended contract, Whiston's bonus has been reduced and will be paid in stock rather than cash. His potential severance package was reduced, and he received a stock grant of 236,000 shares, which vest over the next 12 to 18 months. The measures were made to "further align
Whiston's interests with those of public stockholders," the company said.
Janus' stock, still down about two-thirds from the bear market that caught the majority of its growth-oriented funds blindsided, has declined in the wake of the scandal. The stock was up 1.8% to $15.10 Friday morning. While Janus still lacks a chief investment officer, has suffered from underperforming funds, has lost many top managers and remains enmeshed in the scandal, some value-oriented money managers think the firm's stock is
one of the best bargains in the market.
If that proves true, the most closely aligned Janus stock investors may be quite happy 18 months from now.