Alliance settles fraud charges

In the largest fraud settlement payment ever by a mutual fund company, Alliance was accused of letting brokers and hedge funds trade rapidly in and out of its funds' shares to profit from stale price data in violation of fund policies.

One of several fund groups being probed for such market-timing misconduct, Alliance agreed to make sweeping reforms in separate settlements with the US Securities and Exchange Commission and New York Attorney General Eliot Spitzer.

The Spitzer settlement calls for Alliance to cut investor fees by 20 percent, or $350 million, over five years -- a concession purposefully excluded by the SEC from its deal with Alliance.

SEC enforcement director Stephen Cutler said at a news conference that the SEC and Spitzer share the same goals -- "to protect investors and punish wrongdoers." But, he said, "The commission believes the appropriate way to take up fee issues is not in a case about market timing. It is in rule-making and that is what the commission is doing."

Spitzer said in a statement that the SEC settlement "sells investors short" and the agency suffers from "a fundamental misunderstanding of the root cause of the harm to investors."

The entire Alliance payment -- consisting of $150 million in disgorgement of ill-gotten gains and $100 million in penalties -- will be returned to investors harmed by the improper trading that chipped away at their returns.

On the size of the settlement, shareholder rights advocate Mercer Bullard, a professor at the University of Mississippi, said, "It's hard to tell whether it is too much or too little because we don't know exactly how much investors really lost."

Alliance, which is majority owned by French insurer Axa, pledged to make a weighted average reduction in fees of 20 percent on its US long-term, open-end retail funds, beginning Jan. 1 for a minimum of five years.

To improve its governance, Alliance said it agreed to ensure that at least three-quarters of the directors on its funds' boards will be independent, and its directors will be able to hire staff to assist them in doing their jobs.

Ethics and internal compliance committees will be set up and a company ombudsman will be installed to whom Alliance employees can go with any ethics concerns, the company said.

Starting in 2005, Alliance said, it will submit to an independent compliance review at least every other year.

Regulators said Alliance made secret deals with market timers to let them pursue short-term arbitrage plays in certain Alliance funds in exchange for their placement of long-term investments in Alliance mutual funds and hedge funds. Alliance neither admitted nor denied wrongdoing in the SEC settlement. The SEC said its investigation of Alliance and other mutual funds is continuing.