SEC Seeks to Ban Columbia From Managing Funds
March 1, 2004
Regulators have gone straight for the throat of FleetBoston, charging two of the company's Columbia units with orchestrating a "massive" market timing scheme and seeking to enjoin Columbia Advisors from serving as advisor to its own mutual funds.
In some of the most damning evidence revealed so far, the SEC and New York Attorney General Eliot Spitzer each allege, in separate cases, that the firm allowed $2.5 billion worth of timing activity with nine individuals and firms. Spitzer's office said that the activity took place in 17 different funds, while the SEC counted 16 at Columbia.
Columbia said it suspended eight employees last week, and estimated that it would pay restitution to shareholders of about $25 million. Settlement negotiations with both Spitzer and the SEC are underway, according to Columbia spokesman Charles G. Salmans.
The charges were not unexpected for FleetBoston, as the firm received a Wells notice from the SEC, but the severity of the abuses is much worse than previously indicated. While reporting its fourth-quarter financial results, the firm said that it believed the allegations related to a "limited number" of arrangements and entities and took place only three funds.
Regulators have come out of the gate swinging. The SEC seeks to enjoin Columbia Advisors from serving as an investment advisor to any registered investment company, effectively prohibiting Columbia from managing its own funds, which could spell disaster for the group.
Seeking to enjoin a firm is not unusual for the SEC, but is generally reserved for the most egregious abuses, according to Tom Ajamie, founding partner of Houston-based law firm Ajamie LLP. Ajamie, a self-proclaimed investor advocate, said the case at Columbia "is the most serious one so far in the growing mutual fund scandal." Ajamie said he was "particularly appalled" that some of the abuses took place in the Columbia Young Investor Fund, which is set up for children.
"There is a very long process that would have to have been gone through before" resorting to enjoinment, said Celia Moore, deputy assistant district administrator for the Boston office of the SEC. "It's part of the statutory relief we can seek and we did include it, but it can only be awarded by a judge."
However, most don't expect it to come to that point and view the threat by regulators merely as the opening negotiation bid. "I think regulators are raising the ante," said Lou Harvey, president of Dalbar in Boston. "I don't think that's what they expect to get at the end. I think it's merely a trick to get more compromise out of Fleet."
Salmans said Columbia is "in negotiations to avoid that eventuality." Columbia also said in a statement that it expects to pay about $25 million in restitution to shareholders. Brad Maione, a spokesman for Spitzer's office, told MME the $2.5 billion worth of timing trades is a "very significant" amount.
Several in the industry think the $25 million restitution figure is quite a stretch by Columbia. "I'm having a hard time believing the parties that were involved in timing captured only 1% for their activities," said Lipper Senior Analyst Don Cassidy, adding though that without the detailed trading records, it's tough to tell the damage done.
"It's the other end of the bid," said Dalbar's Harvey. "It's really just the game of finding a settlement point inbetween."
David Kathman, a mutual fund analyst with Morningstar of Chicago said the $25 million figure is "not nearly enough to reimburse everybody for what happened." In comparison, MFS had reportedly allowed $1.3 billion worth of timing activity in its funds and eventually ended up agreeing to a settlement worth $351 million. Reportedly $175 million of that figure was restitution payment.
As for how a FleetBoston settlement might match up, Kathman said: "You can't necessarily just go by dollar amounts because there may have been different degrees of culpability."
However, the SEC's Moore said it is important to keep in mind that the $2.5 billion represents the total dollar figure of all the purchases of the nine traders. "To some extent they may have been recycling dollars," she said. "These may be the same dollars."
"Columbia managers and executives knew that making arrangements with market timers was harming long-term investors, but they facilitated it because it was a lucrative source of fee revenues," Spitzer said in a statement.
Specifically, regulators allege FleetBoston allowed preferred customers to market time its funds, contrary to prospectus language. The complaints also allege that during the time Columbia maintained an "Authorized Accounts For Frequent Trading" list, many of its prospectuses stated it forbade timing. Also, while it was engaged in these arrangements, it also updated its prospectuses including a "Strict Prohibition" of timing in a number of its funds.