States team up in fund inquiry
Join Mass. to tackle broadening probe
The Massachusetts investigation into mutual fund trading abuses is growing into a multistate probe, with securities regulators from as far away as Alabama and Washington state pitching in to help with the broadening inquiry.
Securities regulators from other states will help with subpoenaing documents, taking testimony, and analyzing possible trading abuses at a variety of local fund companies, according to regulators involved in the process.
"We're reaching out to a number of states," said Secretary of State William F. Galvin in an interview. "Where we see connections to other states -- if the fund company is based in those states, or there's an individual with connections to those states -- we're asking for their assistance."
The goal, said Galvin, is to move the mutual fund investigation along quickly -- a monumental task given the sheer number of fund companies in the United States and the huge volume of paperwork and records generated by government requests for documents.
"We don't want to leave any stone unturned in this investigation," said Galvin. "We want to be as thorough and methodical as we can be, but we don't want to overburden states with limited resources."
So far, securities regulators in New Hampshire have assisted by serving subpoenas on MFS Investment Management, Fidelity Investments, and Loomis Slayles & Co.
But others are joining in, coordinated by Joseph P. Borg, director of the Alabama Securities Division and chair of the enforcement section of the North American Securities Administrators Association, a trade group for state regulators. "Alabama will participate and Washington will participate," said Borg. Other state assignments will be finalized today or tomorrow, he said.
"Massachusetts has done a yeoman's task," said Borg. "They're out there in front of this issue. Any assistance Massachusetts wants it will get from a number of states. And if they have issues they want to downstream to our other members, we're willing to help."
The arrangement is different from when New York Attorney General Eliot Spitzer enlisted states to investigate individual Wall Street investment banking firms in 2001. With a limited number of Wall Street firms to investigate, Spitzer farmed out individual firm investigations to several states, with the process overseen by the securities regulators group. Massachusetts was responsible for investigating and prosecuting Credit Suisse First Boston. States are assisting Massachusetts in its mutual fund investigation in a much more informal way, Borg said.
The analyst prosecutions were jointly resolved by the so-called global settlement in which 10 investment banks paid combined penalties of $1.4 billion and agreed to broad reforms to separate equity research from investment banking.
In the current investigations, there has been strong competition among state and federal regulators to show they're on top of the biggest scandal to surface in the $7 trillion fund industry.
Galvin and Spitzer have capitalized on the SEC's early missteps when it failed to act this year on a tip about trading problems at Putnam Investments.
Later, Galvin criticized the SEC when it reached a speedy settlement with Putnam, which he said didn't go far enough. In recent weeks, however, many regulators have toned down their rhetoric and seem willing to work together more closely.
Meantime, other states are pursuing their own investigations concurrently. Colorado investigators are looking at Invesco and Janus Capital Group, while Wisconsin regulators are looking at Strong Financial Corp. and its former chairman, Richard S. Strong.
The market-timing scandal broke in September when Spitzer announced a $40 million settlement with Canary Capital LLC, a New Jersey hedge fund, for alleged market timing and late trading in mutual funds. Galvin had already launched an inquiry into the Boston office of Prudential Securities, where brokers allegedly let some clients engage in market timing.
In late October, Galvin and the SEC filed separate civil charges against Putnam for a variety of trading abuses involving both clients and portfolio managers.
Jeffrey Krasner can be reached at krasner@globe.com. 