n what the Securities and Exchange Commission
calls the first case of its kind, the SEC today censured and fined the former chief investment officer of Van Kampen Investment Advisory Corp.
and the company itself.
The settlement included neither an admission of guilt or a denial of the charges brought by the SEC -- but both Van Kampen and Alan Sachtleben
, former CIO of the Oakbrook, Illinois based company have agreed to be censured and "to cease and desist from violating the antifraud and reporting provisions of the federal securities laws, and to pay $100,000 and $25,000 civil penalties, respectively."
The suit was brought by the SEC to discover whether Van Kampen and Sachtleben failed to disclose material facts concerning the impact of hot IPOs on their "incubator" Growth Fund
's 1996 performance. The fund, whose managers Sachtleben oversaw, had a spectacular period of growth in 1996 when it was still generally unavailable to the public, returning almost 62% -- mainly due to the fund's investment in "hot" IPOs (IPOs that trade at a premium to their offering price immediately after the IPO).
Sachtleben and Van Kampen then used the fund's 1996 figure to market the fund in early 1997 when shares were made available to the public, without disclosure of the source of such a high return. Although such behavior is misleading, the SEC might not have become involved were it not for an article in TheStreet.com
which brought the fund's performance figures into question.
The article focused on small funds advertising impressive one-year returns without disclosing the source of such returns, with the Van Kampen Growth fund one of those mentioned. After Sachtleben learned of the article, he directed an employee to ascertain the amount of the effect of the IPO investment on the fund's performance. It was determined that the impact was a full third of the return of the fund in 1996. The SEC's calculations raised that number to a full 50% of the fund's return.
But this fact was never disclosed in the course of the fund's marketing, raising concerns that investors were being misled by the lack of inclusion of the pertinent hot IPO investment. Further, representatives of Van Kampen Distributors and Van Kampen Advisory indicated in the press that the investment in IPOs in the fund's first year that " the performance of the (Growth Fund) last year was not greatly influenced by investments in initial public offerings."
Therefore, the SEC determined that the inclusion of the performance due to hot IPOs was material to an investor's decision to invest in the fund, and accordingly ordered the censure of both Van Kampen and Sachtleben and also fined Van Kampen $100,000 and Sachtleben $25,000.
"This enforcement action -- the first of its kind -- demonstrates that it is wrong to raise shareholder expectations of future gains by advertising spectacular past returns when it is highly unlikely those returns can be sustained as the fund grows in size," said SEC Enforcement Director Richard Walker
in a statement.
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