Spitzer, SEC Charge Invesco, CEO

State and federal officials investigating the mutual fund industry filed civil charges against Invesco Funds Group and its chief executive Tuesday, saying the company’s top executives allowed dozens of investors to make improper trades.

Denver-based Invesco, a popular fund line during the go-go days of the 1990s bull market, is the latest fund company to be formally charged in the 3-month-old fund scandal.

The securities fraud charges by the New York attorney general’s office and the Securities and Exchange Commission stand out from other cases in the probe because of the extent to which regulators say trading abuses were allowed. Four of Invesco’s senior executives are accused of sanctioning special trading arrangements with as many as 60 hedge funds, broker-dealers and other investors.

It also is the first case based solely on so-called market timing, the rapid trading practice that can hurt long-term fund investors but falls into a gray area of the law. The case could serve as a benchmark for similar charges expected to be filed against other fund companies.

Amvescap, Invesco’s British-based parent, which has $345 billion in assets, said in a statement that neither Invesco nor its employees violated any laws.

The company said it would vigorously contest the charges.

Amvescap said market-timing regulations were unclear.

“The phenomenon of active trading, which includes market timing in the mutual fund industry, is neither new nor newly discovered,” the firm said. “In fact, daily liquidity is a fundamental feature of any open-end mutual fund, and absent clear regulatory guidance, should not be needlessly restricted. Invesco Funds Group tried in good faith to identify and curb harmful market-timing activities.”

New York Atty. Gen. Eliot Spitzer offered a different view.

“This is a company whose actions injured their shareholders, and we are consequently seeking appropriate remedies to protect the shareholders,” Spitzer said in an interview.

He also suggested that other fund companies could wind up in a similar pickle.

“This is the case that most firms should look at and say that, ‘We are in jeopardy of facing similar action,’ ” Spitzer said.

Officials allege that Invesco management allowed selected investors to profit from market timing -- a trading strategy in which investors seek to profit from inefficiencies in how mutual funds are valued.

Both Spitzer’s office and the SEC also charged Invesco Funds Group Chief Executive Raymond Cunningham.

The charges include violation of fiduciary duties as well as fraud.

New York is seeking damages, restitution and return of all the fees Invesco earned during the period, which totaled about $161 million, according to its complaint.

The SEC also is seeking penalties and disgorgement.

In a separate suit, Colorado Atty. Gen. Ken Salazar said his office charged Invesco with violating his state’s consumer protection act.

The incentive for Invesco, according to the complaints, was to boost its fund assets, thus increasing the fees the company received. By mid-2002, about $900 million allegedly was being used to market-time Invesco’s funds.

E-mails and other documents filed with Spitzer’s complaint portray a firm in which executives first promoted special trading agreements and then became concerned that the practice had gotten out of hand.

In addition to Cunningham, Chief Investment Officer Timothy Miller, Senior Vice President of National Sales Thomas Kolbe, and Michael Legoski, who was responsible for policing market timing, also were involved in developing the agreements, according to the New York complaint.

One set of e-mails between Cunningham, Kolbe, Legoski, Miller and an unknown participant showed a concern about increased timing by one of the hedge funds, New Jersey-based Canary Capital Partners.

Cunningham said Invesco had reached a point “where either our communication with them has broken down or they have chosen to ignore the original parameters we discussed.”

The unknown participant, whose name was blacked out in Spitzer’s exhibit, said he would “not accept another penny of their money.”

Miller said Canary and other timers “are costing our legitimate shareholders money.”

Canary settled allegations of illegal trading with Spitzer’s office on Sept. 3 without admitting or denying guilt, agreeing to pay $40 million in damages and restitution.

As part of the settlement, Edward Stern, Canary’s principal director, agreed to cooperate in the probe.

Market timing is not necessarily illegal, but funds can violate their fiduciary duties if they bar long-term investors from the practice while privately allowing speculative investors to engage in it.

Most funds have policies to stem excessive trading because the practice can diminish the returns of its funds for long-term holders by driving up costs.

The SEC’s lawsuit said Invesco made “secret exceptions” to its own disclosed market-timing policy, and that the exceptions were not disclosed to other investors or members of its board.

One Invesco memo provided by Spitzer’s office said the trading exceptions were “not in the best interest” of Invesco’s shareholders, and that the company might be “incurring business risk” by continuing the practice.

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Mutual fund scandal at a glance

Here are some of the companies involved in the scandal enveloping the mutual fund industry, along with some of the allegations and the status of each firm. In some cases, only employees and not the company itself have been charged. Most of the allegations relate to market timing (the rapid trading of mutual funds to take advantage of price inefficiencies) and late trading (allowing funds to be traded after the market’s closing bell at that day’s closing price).

*--* Nature of allegations Employees against the firm who quit or Company and/or employees Status were ousted Alliance Capital Mgmt. Market timing Negotiati 4 ng with regulator s Bank of America Late trading Criminal At least and civil charges and market timing filed 5 against former broker Bank One Market timing Awaiting 2 possible charges Charles Schwab Late trading Regulator 2 s probing trading and market timing practices Federated Investors Late trading and Released 3 results of market timing internal probe Fred Alger Management Market timing, Ex-execut 1 ive settled civil suit, obstruction pleaded guilty to obstructi on Invesco Market timing Civil 0 fraud charges filed against firm Monday Janus Capital Group Market timing Conductin 1 g internal probe Loomis Sayles Market timing Halted 0 improper trading deals Morgan Stanley Improper sales Paid $50 0 million to settle practices SEC civil charges Pilgrim Baxter Market timing Company 2 and founders facing civil charges; founders resigned Prudential Securities Market timing 7 7 employees face civil charges Putnam Investments Market timing Settled 7 SEC fraud charges; facing federal fine and state claims Strong Capital Market timing Founder 1 resigned

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