Settlement Costs Invesco, AIM $451M
September 13, 2004
Amvescap, the London-based parent of Invesco Funds and AIM Advisors, said last week it has agreed to a $451 million settlement with several regulators, including $75 million in reduced fees, to resolve charges of improper trading activity by the sister shops.
Under terms of the agreement, Invesco will pay $325 million, while the deal will cost AIM $50 million. In addition, the groups agreed to reduce fees by $15 million a year over a five-year period and surrender an additional $1.5 million for investor education and legal fees to Colorado Attorney General Ken Salazar's office. When the fee reductions are incorporated into the total, the settlement ranks as the third-largest, behind the Bank of America/Fleet deal and the Alliance Capital agreement.
Regulators found that between early 2001 and mid-2003, Invesco entered into timing agreements, which it called "special situations," with more than 40 market timers. The rapid-fire trading activity totaled more than $58 billion. The practice at AIM was considerably less frequent, but still significant, as the Houston-based shop negotiated deals with more than 10 market timers, including at least one hedge fund, in violation of language in its prospectuses.
Salazar's office, as well as New York Attorney General Eliot Spitzer, announced the completion of the preliminary agreements. Both said the deals were jointly negotiated with the Securities and Exchange Commission, although as of press time, the SEC had yet to make a statement, and a Commission spokesman said he was unaware of any timetable for an announcement.
Colorado's Division of Securities also contributed to the settlement, and the Secretary of State of Georgia was "agreeable to the resolutions with other regulators," Amvescap stated in a press release.
"Our primary goal was to address what we thought was egregious activity," said Jan Zavislan, deputy attorney general for consumer protection in Colorado. "The AIM piece of this settlement is not nearly as substantial, and that was reflected in the amount of timing activity going on in that fund complex." However, the sheer magnitude of trading activity, the number of timers and the amount of money involved were the driving forces behind the settlement number at Invesco, Zavislan said.
Of the $325 million Invesco will pay, $215 million is to reimburse shareholders for damages and $110 million is in penalties. Therefore, the fine is roughly half that of the actual damage deemed done to shareholders. However, while the overall total at AIM is much less, the penalty is proportionally much higher. Regulators are requiring the firm to pay $20 million in damages and $30 million in penalties, a fine equivalent to 150% of the monetary harm done.
The SEC previously has said it bases damages and penalties on a one-to-one ratio and can adjust that rate based on the level of cooperation a firm displays. The AIM portion of the settlement was primarily brokered by Spitzer and the SEC, but a Spitzer spokesman declined to comment on how the fine was derived for the Houston-based fund shop.
Exactly how the fee reductions will be implemented is also unclear, as the two shops are closely intertwined and Denver-based Invesco has been in the process of gradually folding into the AIM group. Last Wednesday, it was revealed that the Invesco brand will disappear on the U.S. retail side, but the time frame and details of such a move were unclear as of press time. Zavislan said it will be up to the fund manager to come up with a plan to implement the fee reductions. "It's probably fair to assume that whoever the successor to Invesco is, as well as whoever is managing the AIM funds, will come up with some formulations to roll back fees to the tune of $75 million over the next five years," he said.
In its settlement, Janus Capital formulated a plan as to how it wanted to implement those fee reductions, and it is likely Amvescap will do the same. Any proposal would be reviewed principally by Spitzer's office since it is an issue or remedy he is pushing. Regulators would then likely tinker with the proposal and a final resolution would need to be agreed upon.
"It's a little early to know how the reductions are going to work out," Zavislan said. "It probably won't be through Invesco, because I'm not sure they are going to be around managing any funds here [in Denver] in the near future, but it is going to be AIM and whoever succeeds Invesco, and it will be apportioned appropriately among Invesco funds and AIM funds." A Spitzer spokesman declined to explain how the reductions will work.