September 15, 2003
Spitzer Probe Could Derail Janus Capital's Rebound
For Janus Capital, which has spent more than two years trying to right itself from the brutal outflows that accompanied the crash in tech stocks, the image damage resulting from New York State Attorney General Eliot Spitzer's investigation could hardly have come at a worse time. Analysts said Janus could be saddled with a reputation problem whether or not it is charged with breaking the law through market timing and late trading, and even if it makes restitution to investors.
In a letter to shareholders, Janus CEO Mark Whiston stressed that the firm has not been named as a defendant in any legal proceeding and was not mentioned in connection with the after-market trading allegations.
"It looks like what Janus did was not illegal but questionable business practices,'" said Ken Worthington, an analyst at CIBC World Markets. He said these practices "are common throughout the industry," an observation backed by another analyst. But they raise questions that may turn off investors and clients at a time when Janus is on the rebound.
Worthington said he did not expect the firm's earnings to be impacted. However, retail sales and the institutional business could be hurt, he said.
The risk to Janus is perceptual more than financial, agreed Robert Lee, an analyst at Keefe, Bruyette & Woods. "That's probably the biggest risk for the whole industry."
Of the four fund providers named in Spitzer's case, Bank One and Bank of America are both highly diversified, but Janus and Strong are pure-play fund companies. Strong is privately held, but the damage to Janus' shares was severe. In the first two days after Spitzer announced his case, the stock fell nearly 12%.
Worthington said the real issue for Janus is that some of its alleged activities were discouraged in a disclosure in the company's prospectus. However, "the language is vague enough, according to lawyers I have spoken with, that it may be difficult for Spitzer, the SEC or individual shareholders to really go after Janus," he said. "The real risk I see is a headline risk," he said.
Any assessment of the company will also depend on what else comes out of this investigation and what tack the attorney general's office takes as it examines these companies and their practices, Lee added.
Fund industry consultant Geoff Bobroff, principal of Bobroff Consulting in East Greenwich, R.I., said a number of companies engage in market timing and that late trading is widespread in the industry because of the need for certain kinds of companies, like retirement plans, to process a large number of trades with a fund after the market closes.
Though some companies may have violated their own disclosures or formed relationships with companies that engaged in improper activity, as Spitzer alleges, these factors alone do not make market timing illegal, Bobroff said. "I am not a fan of market timing," he said. "If I were in a fund company, I would discourage market timing, but that doesn't mean it's illegal."
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