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SEC to Examine Asset Managers' Allocation of IPO Shares

Agency wants to know whether firms favored hedge funds over mutual funds for hot stocks.

November 07, 2003|From Bloomberg News

The Securities and Exchange Commission is expanding its probe of the money management industry to examine whether companies favored their own hedge funds when distributing shares of hot new stock offerings.

The issue for SEC investigators is whether money managers channeled sought-after shares of initial public offerings to hedge funds rather than mutual funds, whose customers pay lower fees.

Delving into how often-lucrative IPOs were allocated among investors would open up a new front in the broadening investigation into wrongdoing in the mutual fund industry.

"There's a continuing interest in whether the allocation of securities between accounts is done fairly," SEC Enforcement Director Stephen M. Cutler said.

Alliance Capital Management Holding, which runs hedge funds and mutual funds, is among the firms being investigated, said a person familiar with the inquiry who declined to be named.

Alliance Capital said Thursday that it was in discussions with the SEC to resolve an investigation concerning improper mutual fund trading.

Alliance said in a statement that the market-timing probe had "raised supervisory issues, which the firm is pursuing vigorously." The firm didn't mention IPO allocations.

Hedge funds -- investment pools that cater to wealthy investors -- are one of the most lucrative areas of money management because they rake in higher fees than do mutual funds, which are owned by 95 million Americans.

Securities regulators already have examined favoritism in how investment banks allotted IPOs during the stock market boom that ended in 2000. Regulators have alleged that Citigroup Inc.'s Salomon Smith Barney Inc. and Credit Suisse First Boston awarded IPOs to corporate executives who were in a position to grant investment-banking business.

Frank Quattrone, CSFB's former Silicon Valley-based technology banker, faces government charges that he obstructed investigations into how his bank allocated shares in IPOs.

Now, the SEC is interested in "whether investment advisors who managed both hedge funds and mutual funds fairly allocated IPOs," said SEC spokesman John Nester.

Portfolio managers receive larger fees from hedge funds than they do from mutual funds, which can create an incentive for a manager to push attractive IPO shares to hedge funds, said Jay Ritter, a professor of finance at the University of Florida.

Since July, the SEC has accused certain money managers of failure to properly disclose how IPO shares were allocated among mutual funds. American International Group Inc.'s John McStay Investment Counsel agreed to pay $200,000 to settle allegations that it failed to make disclosures about a procedure for allocating IPO offerings that the SEC said gave an advantage to the Brazos Mutual Funds.

The issue of mutual fund managers engaging in improper IPO allocations was raised at a congressional hearing Tuesday by Rep. Rahm Emanuel (D-Ill.). Emanuel asked New York Atty. Gen. Eliot Spitzer if that possibility was under review.

Spitzer said IPO allocations to mutual funds were a "fertile area" to investigate and promised to follow up.

The SEC and other regulators "should take a look at what was going on and see if this was self-dealing," Emanuel said. "Were funds being distributed to average investors in the account, or to large institutional investors in funds at the expense of average investors?"

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