SEC opens probe in Boston
Agency talks to staff, collects information as it eyes Prudential's fund-trading practices
The Securities and Exchange Commission yesterday opened a probe of Prudential Securities in Boston, sending investigators to the firm's 100 Federal St. office to collect information and meet with employees, two people briefed on the regulators' visit said.
The SEC's inquiry follows disclosures last week of state and federal probes into improper mutual-fund trading practices by hedge funds and other large investors. The Massachusetts Securities Division is looking into allegations that several Prudential brokers have made a multimillion-dollar business of trading in and out of mutual funds to make quick profits at the expense of long-term shareholders, a practice known as market timing.
Prudential spokesman Jim Gorman would not discuss the SEC visit yesterday. "Because this is an active regulatory inquiry," Gorman said, "we decline to comment."
New York-based Prudential Securities, which in July merged with Wachovia Securities of Richmond, to form one of the nation's largest brokerages, last week acknowledged receiving the Massachusetts Securities Division's subpoena and said the firm was cooperating with the regulators. Prudential has acknowledged that its brokers engaged in market timing as recently as last year, but the firm said it put a policy in place to stop the activity in January.
SEC officials yesterday wouldn't confirm or deny the investigation of Prudential's Boston office. The agency last week sent out 100 information requests to the nation's largest mutual fund groups and brokerage firms, asking firms to "detail their policies and procedures on market timing and delayed trading," SEC spokesman John Nester said. Those firms, which represent 75 percent of the industry's assets, Nester said, have until Monday to reply.
Two mutual fund firms at the center of the growing industrywide investigation also pledged yesterday to reimburse shareholders for any losses that resulted.
Bank of America and Janus, both named last week by New York Attorney General Eliot Spitzer as having done business with a broker who engaged in so-called market timing and late trading, said yesterday that each will hire outside auditors to determine whether shareholders lost money as a result. If so, both fund companies said they would make financial amends to their customers.
Spitzer opened the inquiry by announcing that a New Jersey-based hedge fund, Canary Capital Partners LLC, had agreed to pay $40 million to settle charges that it had engaged in illegal trading practices with several mutual fund companies, including Bank of America and Janus.
Market timing, although not illegal, is discouraged or prohibited by most in the mutual fund world because it raises costs for small investors to benefit bigger traders who move quickly into and out of specific funds. Most fund groups have rules prohibiting or limiting the practice, because it tends to increase trading costs for the funds and force managers to deal with large amounts of short-term cash, which can inhibit the strategies they would use otherwise.
The problem with market timing, said Boston securities lawyer Mark Goshko, arises when fund companies claim they limit the practice when, in fact, they don't.
"If you disclose you aren't allowing it, but then it goes on, the other shareholders are absorbing the additional costs" generated by market timing, said Goshko, co-chairman of the Boston Bar Association's committee on investment companies and advisers.
Late trading, on the other hand, is illegal. It occurs when brokers allow investors to buy mutual fund shares after the supposed market close, frequently because news was subsequently released that's likely to impact the next day's open.
No Boston fund companies yesterday said they had plans to initiate their own audits of their trades, but some executives pointed out that no Boston firms had been named by regulators investigating the disputed trading practices, either.
Boston-based MFS Investment Management, which was listed in some published reports this week as having accepted trades from brokers affiliated with Canary Capital Partners, reiterated yesterday that it actively combats market timing and late trading in its funds. "We don't allow after-hours trading," said MFS spokesman John Reilly, "and we do not have a relationship with Canary."
Beth Healy can be reached at bhealy@globe.com; Scott Bernard Nelson at nelson@globe.com.
