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Friday, September 3, 2004

The Spitzer Four: Where Are They Now?

Reported by Theresa Sim

On September 3, 2003, New York State Attorney General Eliot Spitzer fired a shot heard around the mutual fund world.

That was the day that Spitzer released a complaint against Canary Capital Partners, alleging that the hedge fund, with the help of fund companies, brokers, and a trust company, late traded and market timed dozens of mutual funds, profiting by "tens of millions."

Bank of America's Nations Funds, Bank One's One Group, Janus, and Strong were all named in the complaint, and were the first to feel the heat.

Out of the four fund families, three have merged with other fund firms or banks. MFWire takes a look at where the first four are now, one long year later.

Nations Funds

Nations fund trustees announced an internal audit in September following Spitzer's suit. Also in September, Edward Bedard was appointed interim head after Robert Gordon left the firm. Gordon's emails were included in Spitzer's complaint.

Parent company Bank of America reached a settlement with regulators in mid-March, agreeing to exit the mutual fund clearing business and pay $375 million in disgorgement and penalties. At the time, regulators said that their investigation was continuing. (Also on the same day, FleetBoston settled regulators' charges that its Columbia Management arm permitted timing. FleetBoston agreed to pay $140 million in penalties and disgorgement.)

Nations Funds' directors battled back against the terms of the settlement, which included the forced resignation of eight of the ten directors by May 1, 2005.

Bank of America and FleetBoston went ahead with their previously announced merger plans, finalizing the deal on the first of April.

In early September, Bank of America named Christopher Wilson as head of its newly merged asset management arm, Columbia Management. Industry watchers predict a shakeup in the fund family's duplicative and lackluster lineup.

One Group, No More

Mark Beeson, former president and chief executive officer of One Group and senior managing director of Banc One Investment Advisors, resigned in October. Bank One named Dave Kundert his replacement.

Anticipating regulatory action, Kundert announced in December that the fund family would renegotiate soft dollar arrangements, disclose portfolio manager compensation, add redemption fees, add compliance officers and elect new directors.

In January, JP Morgan announced it was acquiring the One Group fund family, creating a $221 billion fund family.

Banc One Investment Advisors dished out $50 million in a late-June settlement with regulators. Beeson was ordered to pay $100,000 and barred from the fund industry for two years, and from serving as an officer at an investment company for three.

In August, the two firms announced that the One Group brand will essentially disappear under the JPMorgan Fund group, although Banc One Investment Advisors will still retain their independence. Banc One Investment Advisors and JPMorgan Asset Management will both operate under JPMorgan Fleming.

Janus…Battling Back

Janus reached an "in principle" agreement with regulators for $226.2 million in April. In July, the fund firm lowered fees on some funds, and by August, it had reached a final settlement with regulators.

Personnel-wise, Mark Whiston, former chief executive officer, and Lars Soderberg, executive vice president of institutional sales, resigned in April and July, respectively. Steve Scheid replaced Whiston as chairman and chief executive officer.

John Zimmerman replaced Soderberg when Soderberg took a leave of absence in April. Soderberg left with $1.5 million in cash and $1 million in deferred compensation (which is his to keep, if he is not found guilty of any wrongdoing).

Gary Black joined Janus in April as president and chief investment officer.

Janus executives said they were undertaking a number of measures to turn the company around. They will embark on a "back to basics" ad campaign this fall, and launch new share classes to increase insurance broker-sold defined contribution and broker-dealer distribution On the investment side, Janus executives said they would aim to add 200 analysts and restructure the way it compensates managers.

ING withdrew $5 billion in Janus funds in August, continuing the outflow trend. It was not immediately clear that the withdrawal was related to the scandals.

Not Strong Enough

Richard Strong, founder, chairman, and chief executive officer of the firm, announced his intention to resign and sell the firm in December.

Months of speculation later, Strong finally found a buyer and agreed to settle with regulators. Strong Capital agreed in late May to pay $80 million in penalties and disgorgement, while Richard Strong paid $60 million. Anthony D'Amato, former executive vice president, also paid $750,000 in disgorgement and penalties and Thomas Hooker, former compliance officer, was fined $50,000. At the time of the settlement, Richard Strong also issued a rare apology for his involvement in setting up trading agreements.

Wells Fargo purchased Strong in late May, picking up $34 billion in total assets -- $27 billion of which was in mutual fund assets. The deal is expected to close in early 2005.

The Others

Fund firms were not the only ones named in the suit. Of the others named in the suit, one was acquired and one is selling off its last remaining business.

Canary Capital Partners
The hedge fund at the nexus of the scandals got off early, and rather easily. Canary Capital and Canary executive Edward Stern settled with regulators for $40 million. The settlement was announced simultaneously with the complaint. As part of the settlement, Stern and Canary promised to work with regulators.

Security Trust
Former Security Trust Chief Executive Officer Grant Seeger resigned in October.

Nicole McDermott, a former vice president at the Phoenix-based trust company, pleaded guilty to securities fraud in December. AST Trust Company acquired Security Trust in December. STC's new owners promised a "seamless" transition of service.

In April, the SEC ordered Security Trust's new owners to pay $1 million in disgorgement, although regulators claimed that Security Trust earned as much as $5.8 million from aiding Canary. Regulators gave AST a break because the parent had other obligations to pay.

Spitzer's case against Seeger and former executive William Kenyon will begin on November 1 after a long summer of hearings. Both have pleaded not guilty to charges of grand larceny and fraud.

Bank of America
Charles Bryceland, head of Bank of America's brokerage and private lending unit, was fired in September. Theodore Sihpol, the broker that allegedly courted Canary's business and helped execute trades, resigned, also in September.

Bank of America reached a settlement with regulators in mid-March, agreeing to exit the mutual fund clearing business and pay $375 million in disgorgement and penalties. Regulators found that BoA permitted abusive trading of its own Nations Funds as well as aided timers trade other funds. At the time, regulators said that their investigation was continuing.

Regulators are continuing their case against. In April, Sihpol pleaded not guilty to charges of fraud, grand larceny and falsifying business records. The judge in the matter tentatively set Sihpol's trial date for February 2005.

JB Oxford & Company
JB Oxford has not been charged by regulators, but it is under investigation. The brokerage said it received a Wells notice from the SEC on April 12. JB Oxford unit National Clearing Corp. also received a Wells notice from the SEC on November 6. Company officials say they intend to "vigorously defend itself" against allegations that the company helped Canary trade abusively.

To that end, JB Oxford put NCC up for sale in August, its last remaining business unit, to pay for legal and other operating costs.

Kaplan & Co. Securities Inc
Spitzer's complaint alleged that Kaplan entered into an agreement with Canary that allowed for the possibility of late trading. One year later, it appears that the brokerage may have escaped scot-free. 

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