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Fund Firm RS Investments Says It Is Being Investigated by SEC

March 03, 2004|Josh Friedman | Times Staff Writer

San Francisco mutual fund manager RS Investments, a spinoff of brokerage Robertson Stephens Inc., disclosed that it is under investigation by the Securities and Exchange Commission and New York Atty. Gen. Eliot Spitzer's office for possible improper trading.

The SEC may file civil fraud charges against the firm and certain unidentified employees, RS Investments said in an agency filing late Monday. At that time, RS Investments said the SEC and Spitzer's office were investigating possible "market-timing" trades in the $1.6-billion RS Emerging Growth fund, which focuses in smaller stocks.

The SEC and other state and federal regulators are investigating more than two dozen firms over various trading and sales practices in the $7.5-trillion mutual fund business.

Market timing, or rapid in-and-out trading aimed at exploiting inefficiencies in fund pricing, has drawn much of the scrutiny. The practice is not necessarily illegal, but most fund companies say they discourage or prohibit it, noting that it can hurt long-term shareholders in part by driving up transaction costs. Regulators say some firms allowed select investors to time funds in exchange for hefty investments elsewhere.

In a statement on its website, RS Investments' chief executive, Randy Hecht, says the funds' prospectuses do not specifically address the issue of market timing, but that timers were removed from a fund if the portfolio manager considered them detrimental to its performance. "In light of recent events," he adds, RS Investments no longer allows timing under any circumstances.

The Emerging Growth fund is run by James Callinan, who joined the firm in 1996 from rival Putnam Investments and became a star during the dot-com boom. Callinan was named Morningstar Inc.'s domestic stock fund manager of the year in 1999, when the fund rose 182.5%.

RS Investments spokeswoman Amy Hyde declined to comment on the probes.

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