2 ex-state workers used market timing
Practice not banned by state pension rules
Two former Massachusetts employees repeatedly traded in and out of international mutual funds through their state retirement account, Treasurer Timothy P. Cahill's office said yesterday. The former employees have been ordered to stop the practice, which is not forbidden by current state rules.
Cahill's office said Jerome and Susan Eng of Canton made more than 100 trades this year between international stock funds and money market accounts, including two dozen in recent weeks as the issues of market timing and abusive trading practices ripped through the mutual fund industry.
However, an aide to Cahill acknowledged that the state employee deferred compensation plan in which the Engs had their account did not have a policy against market-timing trades. And, in an interview, Jerome Eng said the trading by him and his wife "wasn't anything illegal. It should be their fault for allowing that."
Eng said the couple had already halted their trading after receiving an Oct. 30 certified letter from Cahill's legal counsel asking them to "cease and desist from engaging in this trading practice." Eng declined to say how much money he and his wife made from such trades, or provide other specifics about their accounts. Cahill's office said it was unable to determine how much the couple profited from the trades.
Market timing is the repeated trading in and out of mutual funds to squeeze profits from pricing inefficiencies, such as funds with international securities that are traded on overseas exchanges that close hours before US markets. While not illegal, mutual fund companies say they discourage such frequent trading because it drives up fund expenses and lowers performance for all investors in the fund.
Most of the focus of government investigations into market timing has been on whether mutual fund companies allowed either employees or outside investors to conduct repeated trades despite explicit policies prohibiting them. For example, Massachusetts regulators filed civil securities fraud charges against Putnam Investments for, among other reasons, allowing members of a New York trade union to make hundreds of trades in and out of its international funds over a three-year period. But the state did not charge the union members who made the trades.
First Deputy Treasurer Doug Rubin said his office will develop a policy toward excessive short-term trading in the $2.9 billion plan over the next two months, as well as a plan to halt such trading.
"Everyone's struggling through these market timing issues" since the issue engulfed the mutual fund industry in scandal, Rubin said. "We think from a fiduciary standpoint, we have a responsibility to protect other people in the plan" from excessive trading.
Cahill's office ordered the money managers and financial custodians of state retirement plans to review their policies and procedures toward market timing after New York Attorney General Eliot Spitzer first disclosed the problem of trading abuses in the mutual fund industry in early September. The Engs' trading was detected in late September by Capital Guardian Trust Co., which manages an international equity fund for the state deferred comp plan. A further review determined the couple traded in and out of the Capital Guardian fund and another international fund managed by Barclays Global Investors. The Engs are the only ones so far among 241,113 plan participants that Massachusetts officials determined did excessive trading.
Eng declined to say what jobs he and his wife held for the state. Rubin was unable to provide that information either, but said Susan Eng retired in 1996 and Jerome Eng retired last year.
Andrew Caffrey can be reached at caffrey@globe.com.
