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Mutual Fund Settlement Considered Unlikely

November 11, 2003|From Bloomberg News

NEW YORK — Mutual fund companies under investigation for improper trading, including Strong Capital Management Inc. and Janus Capital Group Inc., are unlikely to reach legal settlements with regulators that will lead to an industrywide agreement, fund executives and lawyers said Monday.

New York Atty. Gen. Eliot Spitzer plans, instead, to negotiate separately with individual companies, demanding changes in business practices that can be used as a model for other companies, according to a person familiar with the matter.

Unlike the single, $1.4-billion global settlement Spitzer forged in April with 11 Wall Street securities firms accused of issuing biased stock research, the mutual fund probe may touch scores of companies in the $7-trillion fund industry, lawyers and executives said.

"There's not going to be a global settlement," said Paul Haaga Jr., executive vice president of Los Angeles-based Capital Research and Management Co., the third-largest U.S. mutual fund group. "If new rules are required, they'll come from Washington, not Spitzer," said Haaga, who also is chairman of the Investment Company Institute, the mutual fund industry's lobbying group.

The breadth of the investigation -- both in the range of charges and the companies involved -- probably makes a single, blanket agreement inappropriate, said Massachusetts Secretary of the Commonwealth William Galvin, who has filed civil fraud charges against Putnam Investments and two of its fund managers.

"With the securities firms, the behavior and the situations were similar," Galvin said. "You don't have that here."

Spitzer is in talks with firms including Janus, Strong and Bank One Corp. to decide whether to bring charges over improper trades in mutual fund shares or to agree to an out-of-court settlement, the person familiar with the matter said last week. Spitzer's spokeswoman, Juanita Scarlett, declined to comment, as did Strong, Janus and Bank One.

The global accord on conflicts of interest in Wall Street research allowed the 11 securities firms to contain the issue by paying fines while not admitting wrongdoing. That's something regulators appear unwilling to do with fund firms they accuse of favoring institutional clients and insiders at the expense of individual investors.

"We intend to take these cases to trial," Galvin told a House subcommittee in Washington last week. "If there are settlements, it will be with admissions of wrongdoing."

In addition to Galvin's charges against Putnam, he and the SEC filed charges of fraudulent trading that together involved five former brokers and two former branch managers at Prudential Securities' Boston office.

"We don't think that this is the kind of matter that lends itself to the sort of global settlement that we saw in the research analyst case," said Stephen Cutler, SEC enforcement director.

For his part, Spitzer has said he hopes to "impose pain" on the firms he settles with in the form of penalties, and return "billions" to investors.

From Bloomberg News

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