Invesco Facing Further Fraud Charges
July 19, 2004
Things went from bad to worse for Invesco Funds, as federal securities regulators announced plans to increase the number of individuals facing civil fraud charges.
The Securities and Exchange Commission last week filed a motion with the U.S. District Court in Denver saying it plans to amend its lawsuit to "add additional parties [and] claims" on or before July 26. The SEC has not disclosed the names of those individuals or charges, and Robert Fusfeld, an SEC attorney, declined to comment. "We have previously stated our intention to settle any pending regulatory issues and are hopeful for that resolution in the near future," a spokesman for Invesco parent Amvescap said, declining further comment.
Since the initial charges were handed down late last year, Invesco funds have been bleeding cash at an alarming rate, its long-term mutual funds suffering $2.76 billion in net outflows from Dec. 2003 to June 2004, according to Financial Research Corp. of Boston. The $3.5 billion Invesco Dynamics Fund alone lost $903 million during that period, despite posting a 38.3% return in 2003.
In December, the SEC and New York Attorney General Eliot Spitzer slapped the Denver-based fund complex and Ray Cunningham, Invesco's president, with allegations that they allowed preferred clients to market time its funds and bilk long-term shareholders. The complaint hinged on the fact that the company failed to adequately represent its shareholders, thereby shirking its fiduciary responsibility and acting in contradiction to language in fund prospectuses.
Others named in the suit, but not charged, include Chief Investment Officer Timothy Miller, Senior Vice President of Sales Thomas Kolbe and Michael Legoski, the person responsible for monitoring market-timing activity in Invesco funds. Kolbe and Cunningham are on "voluntary administrative leave," while Miller was relieved of his duties as CIO but remains a portfolio manager on the Invesco Dynamics and Invesco Mid-Cap Growth funds. Legoski, on the other hand, has retired from the mutual fund business, Amvescap said. None of the men could be reached for comment.
Initially, Invesco said it would defend itself "vigorously" against the allegations, but when faced with new evidence, the company decided to negotiate a settlement rather than duke it out in court. In one of several condemning e-mails detailed by Spitzer's office, one executive wrote that market timing in Invesco funds was "killing the legitimate shareholders." Market timing of Invesco funds totaled roughly $900 million in assets, Spitzer's office estimated. Even an internal probe of the impact of its market-timing arrangements showed that Invesco's procedures designed to protect funds and shareholders from the potential adverse impact of frequent trading and illegal late trading were "not completely effective."
Amvescap CEO Charlie Brady initially hoped to have a settlement by the end of the second quarter, but last month, Invesco requested more time to reach a settlement, saying it was cooperating fully with regulators. In April, rumors circulated that Invesco was bracing for $300 million in restitution, fines and fee concessions. When asked if Spitzer plans to bring further charges against the firm, a spokeswoman for the A.G.'s office told Money Management Executive, "We have resolved our matter with Invesco."
On top of assets headed for the exits and regulators furiously beating down its door, Invesco is also coping with a number of class-action lawsuits filed on behalf of harmed investors. For one, Milberg Weiss Bershad & Schulman of New York filed a an "excessive fee" suit on behalf of investors in AIM and Invesco funds, one that alleges that management drew upon fund assets to pay Morgan Stanley brokers to aggressively push its funds and attempted to conceal those payments as soft-dollar brokerage commissions and 12b-1 fees.
"As the funds were marketed and the number of fund investors increased, the result was reduced liquidity and fund performance," said Kim Levy, a prosecuting attorney in the case and a partner at Milberg Weiss. "In addition, these marketing fees were charged in connection with certain AIM/Invesco funds that were closed to new investors. For closed funds, marketing and distribution fees are simply inappropriate."
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