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Alliance Suspends 2 in Trading Probe

The company says it found conflicts of interest on the part of technology and hedge fund executives.

October 01, 2003|From Bloomberg News

Mutual fund provider Alliance Capital Management suspended two employees after uncovering "conflicts of interest" in short-term trading of mutual fund shares.

Alliance suspended the manager of the $3.3-billion AllianceBernstein Technology Fund and a hedge fund marketing executive, the company said Tuesday. The manager of the technology fund has been Gerald Malone. Alliance spokesman John Meyers declined to identify the employees, and Malone didn't return calls for comment.

New York Atty. Gen. Eliot Spitzer is spearheading a probe of special trading privileges given to hedge funds by mutual fund companies. The investigation by Spitzer and the Securities and Exchange Commission has broadened to include a review of trading practices at scores of fund companies, including Alliance.

Spitzer found that mutual fund companies that were losing assets during the three-year stock market drop agreed to give hedge funds access to share prices that weren't available to all investors in return for long-term deposits.

In some cases, they allowed favored investors to trade after the markets closed, and in others they let them time trades to take advantage of changes in price.

Alliance has about $140 billion in mutual fund assets. The firm also had $2.6 billion in hedge fund assets in January, according to the publication Alpha.

"What troubles me is Alliance is a leader in selling hedge fund products, so the fact that their sales team may have done something wrong is a red-flag concern for other asset managers expanding in this area," said Geoff Bobroff, an industry consultant.

Fidelity Investments, the biggest U.S. mutual fund manager, spun off its hedge fund unit last month to avoid conflicts.

Juanita Scarlett, a spokeswoman in Spitzer's office, declined to comment.

Spitzer on Sept. 17 charged a former Bank of America Corp. broker with grand larceny and securities fraud, alleging that he allowed the Canary Capital Partners hedge fund to engage in after-hours trading of mutual funds.

An Alliance fund was among those that Canary Capital used for its trading strategies, according to records released by Spitzer. Canary sold shares of Alliance Growth and Income Fund and invested the proceeds in an Alliance money market fund in a late trade Jan. 13, Spitzer alleged.

Shares of New York-based Alliance, the largest publicly traded U.S. money manager, fell $2.04 to $33.49 in New York Stock Exchange trading Tuesday.

Investors withdrew a net $1.9 billion from Alliance's stock and bond mutual funds during the first eight months of this year, according to Financial Research Corp.

Alliance is America's 24th-biggest mutual fund manager and oversees more than $425 billion for clients.

"Any high-profile publicity like this makes it more difficult to offer their funds to potential investors," said Burton Greenwald, an industry consultant in Philadelphia.

Alliance, which is majority owned by French insurer Axa, said that it had formed a committee consisting of independent board members to review the situation after being contacted by market regulators.

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