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Fund Advisor Agrees to Pay $10,000 Settlement

Securities: SEC fines Davis Selected Advisers unit for failing to notify shareholders that its 'IPO flipping' led to gains in 1999, 2000.

September 05, 2002|JOSH FRIEDMAN | TIMES STAFF WRITER

The Securities and Exchange Commission said Wednesday that it has fined the advisor to the Davis Opportunity mutual fund for failing to tell shareholders in 1999 and 2000 that the fund was rapidly trading initial public offerings of stock, a tactic known as "IPO flipping."

Davis Selected Advisers-NY Inc., a unit of Tucson-based Davis Selected Advisers, agreed to pay $10,000 in settling the civil case without admitting or denying the charges.

The team-managed fund, then called Davis Growth Opportunity, was not accused of receiving preferential treatment when it got shares of 182 "hot IPOs," as the SEC called them, during the mania for new tech stocks that enriched many traders during 1999 and 2000.

But the advisor neglected to disclose that IPO flipping--which is not illegal--led to a big chunk of the fund's gains during those years.

Although Davis cautioned investors at the time that the fund was high-risk and its annual reports listed all stock purchases and sales, it did not specify which trades were in IPO shares, nor did it discuss the overall effect of IPOs on its performance.

The SEC notes in its cease-and-desist order against Davis that fund prospectuses said the advisor's investment philosophy was to purchase "common stock of quality overlooked growth companies at value prices and to hold them for the long-term."

The SEC said the message it is sending to fund companies is clear: Strategy and performance must be fully disclosed.

"By taking this action, the commission is reiterating that an investment advisor must use reasonable care to ensure that it adequately discloses to mutual fund shareholders the fund's investment strategy and the source of investment returns," said Randall Lee, director of the SEC's Western regional office.

The fund earned $6.7 million by IPO flipping in 1999 and $7.3 million in 2000, the SEC said. The fund, which climbed 31.5% in 1999 and 11.5% in 2000, would have risen 23.4% and 6.1%, respectively, without the IPO profits, according to the SEC.

Kenneth Eich, chief operating officer for Davis Selected Advisers, said, "There was no intent to deceive. We could have litigated this matter for two more years, but we chose to take our cease-and-desist order and get on with our lives."

In two earlier cases involving funds and IPOs, Van Kampen Investments Inc. in 1999 and Dreyfus Corp. in 2000 reached settlements with the SEC involving penalties of about $100,000 and $1 million, respectively. In those cases, the fund companies were accused of misleading advertising for failing to disclose that hot IPOs pumped up performance of two aggressive funds in the mid-1990s.

Russel Kinnel, director of fund analysis at Morningstar Inc., said there were differences between those cases and the one involving Davis.

"Davis is low-profile," Kinnel said. "They weren't hyping their performance."

Still, one industry critic called the Davis settlement small.

"The difference between these cases is nowhere near enough to justify the markdown for misrepresenting your performance," said Mercer Bullard, founder of Fund Democracy, which bills itself as an advocate for fund shareholders.

"Why under [former SEC Chairman Arthur] Levitt does it cost you 100 grand when under [current Chairman Harvey L.] Pitt it only costs 10? Misleading is misleading, whether it's in the prospectus or a one-page ad in Money magazine."

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