Janus Internal Inquiry Finds Market Timing, Stress

NEW YORK (HedgeWorld.com)?Janus Capital identified special deals with 12 clients that resulted in frequent trades in five Janus mutual funds despite the company?s policy to discourage such trading, according to a statement by chief executive Mark Whiston.

The company promised to take steps to minimize arbitrage opportunities, which were once a boon for some hedge funds.

Two of the five affected funds, Janus Mercury and High-Yield, were mentioned in the complaint by New York State Attorney General Eliot Spitzer against hedge fund manager Edward Stern?s Canary Capital Partners . The other three funds, Janus Worldwide, Enterprise and Overseas, previously were not named in this connection.

Besides Canary, other hedge funds also could have had deals allowing them to frequently trade some Janus shares. Janus did not identify the 12 favored customers. Only four of these clients actually traded, and the arrangements now have been terminated, Mr. Whiston explained. Mr. Spitzer?s office and the U.S. Securities and Exchange Commission have asked a number of hedge fund managers to provide information about mutual fund trades.

Market timing of mutual fund stocks is not illegal, and there are funds that explicitly allow it. But many discourage it because it can impose costs on long-term shareholders. Some Janus executives might have thought that it is allowed under fund prospectuses.

?While Janus has numerous policies and procedures in place to deter market timing activity, it appears that a few employees believed that limited, controlled market timing was permitted by the prospectus language and was not harmful to the funds or their shareholders,? Mr. Whiston said in the statement.

Some of these people no longer work for Janus. The firm said it is investigating whether current employees acted in good faith.

Fair Value

The other charge Mr. Spitzer brought against Canary, trading after market close to take advantage of new information after the share price is set, reportedly is forbidden by SEC regulation and New York State?s Martin Act. Janus says it found no deals that allowed late trading in its funds.

Some experienced lawyers argue that these rules are not as clear-cut as Mr. Spitzer alleges and that the Martin Act has not been used previously for this particular purpose. Bank of America broker Theodore Sihpol III, who is facing criminal charges for helping Canary trade Bank of America?s Nations Funds after hours, claims he did not know he was committing any crime.

More than two years ago, the SEC was concerned about the trading of mutual fund shares to take advantage of international time differences, a well-known hedge fund strategy. The regulator suggested that to reduce arbitrage opportunities, mutual funds update their NAV to reflect events that happen after foreign markets close.

But it did not forbid the trading practice. At the time in 2001, HedgeWorld published a detailed article on this topic .

Janus said it will focus on fair-value pricing of shares in an attempt to eliminate market timers? gains. Fair-value pricing is a method to reflect in the current price any anticipated future movements.

CKurdas@HedgeWorld.com

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