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Fund Chief Settles Probe

Garrett Van Wagoner agrees to pay $800,000. SEC says he misstated the value of his holdings.

August 27, 2004|Walter Hamilton | Times Staff Writer

NEW YORK — Garrett Van Wagoner, the swashbuckling mutual-fund manager who personified the frenzied stock market of the late 1990s, agreed Thursday to pay $800,000 to settle a federal probe into how he valued the securities in his funds.

The Securities and Exchange Commission alleged that Van Wagoner misled shareholders about his extensive holdings of so-called illiquid stocks. These are shares issued by private firms that can skyrocket if a company does a successful initial public stock offering but can become worthless if the enterprise falters.

Van Wagoner promised shareholders that he would devote no more than 15% of assets to the risky securities. According to the SEC, however, he intentionally understated the value of his illiquid stocks so that he could load up on more.

"He got in this pattern of trying to buy more and more pre-IPO securities hoping to hit a home run," said Michael Dicke, deputy assistant district administrator of the SEC's San Francisco office.

The settlement is a comedown for a fund manager whose intrepid investment style won him adulation during the bull market. At one 1990s investment conference sponsored by fund tracker Morningstar Inc., investors mobbed Van Wagoner while more seasoned fund managers were ignored.

"People said I walked on water," Van Wagoner said in an interview Thursday. "But every time I stepped on it, I fell in."

In the early 1990s, Van Wagoner was a little-known manager at a second-tier mutual-fund firm when he put together a string of winning years. He focused largely on technology stocks and gladly paid nosebleed prices that terrified others.

With a style that seemed tailored to the go-go era, Van Wagoner continued notching outsize returns after launching his own funds in 1996.

In 1999, four of his five funds leapt more than 200% and the fifth surged 127%. At its peak, his firm, Van Wagoner Capital Management Inc., managed nearly $4 billion. That has shriveled to less than $200 million today.

Van Wagoner's performance was fueled in part by investments in illiquid stocks of privately held firms. Most mutual funds shun so-called private placements because of their high risks, including the fact that they can't easily be sold because there is no public market for them.

But like a venture capitalist, Van Wagoner plowed money into private firms in search of fantastic gains. In some case, he decreased the stated value of private placements to artificially shrink their value and allow him to buy even more illiquid securities, the SEC said.

In situations where private companies conduct several rounds of financing, early investors feel pressure to make more purchases to keep their original holdings from being diluted.

As is typical in such settlements, Van Wagoner neither admitted nor denied the SEC charges. He agreed to be barred from serving as an officer or director of a mutual fund for seven years. He agreed to resign as president of his three funds but can still manage them.

Under federal securities law, every mutual fund has a board of directors elected by fund shareholders. The directors, in turn, hire the investment advisor for the fund. So Van Wagoner can continue to manage the funds without holding a board seat.

Roy Weitz of FundAlarm.com, a mutual-fund watchdog website, criticized the penalties as not tough enough.

"It sounds like it should have been several million dollars, something that would hurt," Weitz said.

Two others were fined as part of the settlement, the SEC said. Former fund director Robert Colman was fined $25,000 for failing to get SEC permission to invest in private placements alongside Van Wagoner.

Former company analyst Audrey L. Buchner was fined $35,000 for improper personal trading of securities owned by the fund.

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