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Fund Execs Fail to Certify SEC Documents


At least two fund groups have now experienced, firsthand, the impact of new requirements mandated with the enactment last year of the Sarbanes-Oxley Act. That legislative enactment aimed, among other things, to stem corporate fraud and make top executives accountable for the accuracy of financial reporting.

But many of the 15-month-old law's provisions are also applicable to registered investment companies' publicly offered mutual funds, and some fund advisors are discovering just how important their responsibilities have become.

Two fund advisors, which include Janus Capital of Denver, and Bridgeway Capital Management of Houston, advisor to the Bridgeway Funds, have filed notices in recent weeks alerting the Securities and Exchange Commission that they will be late in filing both their funds' annual or semi-annual reports.

They have also indicated they will be late filing the newly required Certified Shareholder Report (N-CSR), which requires a fund group's top executive and top financial officer to swear that the information contained in their funds' financial statements are true and correct. They must also confirm that any fraud that involves management or employees has been disclosed to the independent auditors and fund board's audit committee.

While fund executives have always been mindful of the need to present timely and accurate financial information to investors, the new certification requirement has made them more likely to make sure all of their "i"s have been dotted and their "t"s have been crossed, said Carl Frischling, partner with the New York law firm Kramer, Levin, Naftalis & Frankel. Lackadaisical or inattentive executives can face both civil and criminal liabilities.

Wake-Up Call

The recent allegations against a Citigroup Global Markets chief financial officer accused of embezzling thousands of dollars from the company's mutual funds, all while signing off as to the accuracy of financial information, was a real wake-up call for the industry, Frischling noted.

On Aug. 21, the SEC sued Irving Paul David, the 42-year-old employee of Citigroup Global Markets who had served as the treasurer and CFO of The Consulting Group and controller of the Smith Barney World Funds. The regulator charged that David stole checks and raided the fund group's slush fund to the tune of more than $47,000 over a two-year period, despite giving the funds' financial reports a clean bill of health by signing a written certification in October 2002.

According to the SEC, the scheme was uncovered this past January and David was quickly fired.

Janus Capital, which is now embroiled in an investigation instigated by New York State Attorney General Eliot Spitzer, has chosen to crunch and then recrunch its funds' data in order to be sure everything is on the up and up, said Jane Ingalls, a Janus spokeswoman. Although neither Spitzer or securities regulators have levied any formal charges against Janus, Spitzer charged that the firm allowed Canary Capital Partners to market time the Janus Funds, all the while Janus was publicly admonishing market timers and stating that it would suspend or terminate them.

Janus "is unable to timely file the N-CSR without incurring unreasonable effort of expense due to delays in the certification process," the firm noted in its Sept. 29 SEC filing.

"These delays relate to the questions raised in connection with the New York Attorney General's recently filed complaint against Canary Capital Partners LLC," Janus' filing went on to say.

Under securities regulations, funds that advise the SEC that their certification filing will be late are granted an automatic 15-day extension period.

"We did file for an extension so that we could continue our internal review," Ingalls confirmed. "Given the seriousness of this issue, it is an expected and appropriate step for us to take at this juncture."

Houston, We Have a Problem

In Houston, an investigation of a different sort was taking place, when Bridgeway discovered a whopper of an error in the calculation of the net asset values on two of its seven funds. To make matters worse, the errors dated back 18 months to a since-terminated employee, but were just recently discovered as the funds' auditors were reviewing the fund group's June 30 fiscal year-end financial reports.

Bridgeway Funds President John Montgomery filed for an initial filing extension on Sept. 5 and a subsequent extension on Sept. 29.

According to Montgomery, the culprit was two offsetting errors which camouflaged the incorrect keystroke mistakes of a long-ago terminated employee, relating to a single security in both the Bridgeway Micro-Cap Limited Fund and Ultra-Small Company Fund. Those errors translated into a 9-cent miscalculation of the net asset value on the micro-cap fund and a 5-cent error in the net asset value of the ultra small company fund, Montgomery noted. Bridgeway handles all fund accounting functions itself.

Painful Mi$take$

Security pricing and related errors are never welcome but are simply a fact of life, Montgomery said.

Typically, errors that lead to changes in a fund's net asset value are rare, but are caught immediately and remedied, usually by the advisor opening its wallet to make the fund and shareholders whole, he said. These two errors are expected to cost Bridgeway Capital $100,000 out of its own coffers to fix, he added.

Once the Bridgeway funds' errors were detected, the independent auditors decided that it would be prudent to go back and test the majority of fund transactions to verify their accuracy, he noted. That review slowed the process and consequently led to the notice of late filing with the SEC, said Montgomery, who agreed that a late filing in this current environment isn't ideal.

Montgomery said that he and the fund's board of directors will be discussing possibly outsourcing the group's fund accounting services.

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