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Week in Review


Alliance to Pay $12 Million In Timing Defamation Suit

Former AllianceBernstein mutual fund sales manager John Carl won a $12 million arbitration lawsuit for having been dismissed from the company on the pretext of his role in the market-timing scandal. FINRA last month ordered Alliance to pay Carl $10 million in compensatory and $2 million in punitive damages. Rather than stating in the SEC U-5 termination report that Carl was "permitted to resign" in connection with the scandal-which cost Alliance $600 million, the highest settlement fee of any company involved-the arbitration panel has ordered the firm to say he was terminated without cause.

Frederick O'Meally, a former broker at Prudential Securities, won a similar, $3.8 million defamation lawsuit at the NASD in 2006, as did three former Merrill Lynch brokers the same year when a New York Stock Exchange arbitration panel awarded the three $14 million, including $12.5 million in lost income, pain and suffering.

Money Funds, Wealth Unit Clobber Legg Mason 1Q08

Legg Mason, citing $206 million in charges tied to supporting money market funds with subprime and other illiquid fixed-income exposure, posted a net loss of $256 million in the first quarter, down from profits of $173 million in the year-ago period. The firm also pointed to problems in its wealth management division that caused its net profits to decline $95 million.

Revenue came in at $1.07 billion on a consensus of $1.12 billion, or a loss of 27 cents a share. Assets under management declined 5% to $950 billion on $28 billion in market losses and $19 billion in net outflows.

Legg Mason's fundamentals are strong, and business continues to be brisk outside of the U.S., said CEO Mark Fetting, "but we know we have work to do. This past quarter was among the most difficult we have ever faced, and we are disappointed with the results."

Millstein, Directors Forum Unite on 'Fund Leaders'

The Millstein Center for Corporate Governance and Performance at Yale University and the Mutual Fund Directors Forum have formed the Conference of Fund Leaders (CFL) aimed at independent board chairmen and lead directors.

The Conference, which will debut in October and already held a successful pilot meeting on Jan. 22 that drew executives from 43 funds, will hold two meetings a year and ongoing peer networking opportunities. Topics for discussion include: governance, regulation, legislation, research and investors.

Noting that with $11.8 trillion in assets, mutual funds account for about one-third of equity ownership in America, John Hill, independent chairman of the Putnam Funds and founding chairman of the CFL, said: "Fund leaders have prime responsibility for ensuring above all that mutual funds serve the interests of citizens who entrust their savings to them. This new body is designed to fortify that oversight.

Other active members on the steering committee of the CFL are: David Ruder, as chairman of the board; Dwight Crane, independent lead director for Legg Mason Partners Equity Funds; William Foulk, independent chairman of AllianceBernstein Funds; Virginia Stringer, independent chairman of First American Funds; and Roger Vincent, independent chairman of ING Mutual Funds.

Fidelity Remains on Wall St.

Fidelity Brokerage Services has renewed its 8,629-square-foot lease at 61 Broadway in lower Manhattan, for another 10 years.

"Fidelity wanted to maintain [its] retail presence downtown, conveniently located near many of its customers and in the heart of the financial district," Daniel M. Blanco, principal of 61 Broadway's Broad Street Development, told Real Estate Weekly.

Mutual Fund Industry Aides Auction Rate Task Force

The turmoil in the $330 billion auction rate securities (ARS) market has spurred a series of investigations by the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), Massachusetts securities regulators and even the Federal Bureau of Investigation. Congressional leaders, as well, are calling for relief, allowing mutual funds to provide liquidity to retail investors holding the securities.

The mutual fund industry is working to come up with a solution for the closed-end fund segment of the ARS market. The Investment Company Institute has submitted a request to the SEC for exemptive relief that would allow closed-end funds to issue debt to buy back the preferred shares.

Charles Ladner, director of Boston-based John Hancock Funds, said the nature of auction rate securities has changed. "Auctions started fairly," he said. Then, "there were a lot of retail people who found themselves locked out of liquidity and need the money. The pressure is on to find some way to find liquidity. We have the obligation of duty and care to preferred shareholders."

The refinancing option is not without risks, cautioned Ladner, including legal and accounting costs. On the other hand, there is the "serious reputational risk suffered by fund companies, brokers who have sold them and their sponsoring firms," he said. "It is solvable, but it is not easy."

Bryan Lantagne, director of the Massachusetts securities division, announced an ARS task force last month and has already issued 15 subpoenas and requests for information to broker/dealers nationwide in an attempt to determine whether they committed any infractions in marketing the securities.

"Investors were not told about liquidity risks and not being able to access their funds," said Karen Tyler, president of the North American Securities Administrators Association, which is coordinating the effort. "There were representations made [that these were] equivalent to money market accounts. All the complaints say that these were money market account-like investments. Some were told it was like a checking account."

The products were sold, not bought, she added, and many small investors who purchased them are ill prepared to lose access to their money.

"What is happening to investors as a result? There are home purchasers who used this money as a down payment and are now losing it," Tyler said. "There are small business owners who cannot make payroll, retirees and farmers. This is hitting mainstream America."

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