Three Invesco Execs Out Amid Timing Probe
July 26, 2004
Just when the mutual fund scandal seemed to be offering little in the way of new twists and turns, the plot thickens.
The Securities and Exchange Commission on Monday plans to file additional claims and add new defendants to its civil fraud suit against Invesco, as previously stated in a motion filed with the U.S. District Court in Denver earlier this month. While the names of the defendants were withheld, the amended complaint is expected to charge one of the Denver-based fund shop's portfolio managers, according to a source familiar with the matter.
The move will signal a new chapter in the mutual fund trading scandal, marking the first time a portfolio manager was charged with fraud in connection with market-timing schemes, the "sticky asset" deals designed to take advantage of stale prices through rapid short-term trading of mutual fund shares. The case is also unique because it is the first time that there has been an amendment to a set of allegations. Typically, the SEC will gather evidence of fraud quite methodically before filing a complaint.
It's possible that the manner in which Invesco handled the complaint created some delays and confusion over what exactly went on at the fund complex and who specifically was involved. 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.
"Invesco didn't handle the situation especially well from a public relations and disclosure perspective," said Don Cassidy, senior analyst at fund tracking firm Lipper's Denver office. "The spirit in which they cooperated with investigators may not have been as forthcoming and as quick as some it was with some of the other firms. Given that there may have been piles of documents and e-mails to go through, things may have come up in a later stage."
The announcement to amend the initial charges came a week ahead of the news that Ray Cunningham, chief operating officer, Timothy Miller, portfolio manager of the $3.5 billion Invesco Dynamics Fund, and Thomas Kolbe, senior account executive, had left the company. A spokesman for AIM Investments, the distributor of Invesco funds, declined comment on the terms of their departures. The three men's attorneys declined comment on the matter.
Last December, the SEC and New York Attorney General Eliot Spitzer filed an administrative complaint against Cunningham and Invesco that he and the firm knowingly permitted preferred clients to market time its mutual funds to the detriment of long-term shareholders. Miller and Kolbe were named in the original complaint but not officially charged. Subsequently, Cunningham and Kolbe were put on "leave," while Miller voluntarily relinquished his duties as chief investment officer to focus more on his duties as a portfolio manager.
The foundation upon which the SEC's case is based is that Invesco failed to adequately represent its shareholders, thereby shirking its fiduciary responsibility. On top of that, the transactions being made were seemingly contradictory to the language found in the prospectuses limiting the number of exchanges.
"We've crunched some numbers [to the point] where we've seen some pretty suspiciously high churn rates on shareholder money at Invesco going back to at least 1997," Cassidy said. "Pushing the envelope into new areas, in a sense, is not a surprise. We haven't gotten to the bottom of this yet."
The fallout from the scandal has been considerable, as evidenced by the number of outflows the fund complex has weathered in the last seven months. Invesco long-term mutual funds have suffered $2.76 billion in net outflows from Dec. 2003 to June 2004, according to Financial Research Corp. of Boston.
Many of the Invesco funds had already been renamed or merged under the AIM brand prior to the mutual fund scandal in an effort to take advantage of AIM's distribution strength. Following the departure of Cunningham, Miller and Kolbe, there are now fewer than 50 employees remaining in the retail money management arm of Invesco's Denver office.
The firm is also coping with a number of lawsuits filed on behalf of harmed investors including an excessive fee suit that alleges that fund 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.
Invesco's profile in the city of Denver has diminished significantly in recent months as it wrestles with these allegations, sparking chatter that Invesco Field at Mile High, the Denver Broncos football stadium, will suffer the same fate as Enron Field. Invesco, which is paying $60 million for the naming rights to the stadium over 20 years, is committed to the deal, said an AIM spokesperson. In addition, Invesco has an advertising contract with the Broncos, also worth $60 million.
While Invesco has continued to make good on its payments, the Denver faithful aren't convinced. "The Invesco name looks like it's going away," Cassidy said. A payment of roughly $2.25 million is due on Aug. 1. To date, Invesco has paid each installment ahead of schedule.
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