BOSTON (HedgeWorld.com)--New York Attorney General Eliot Spitzer and the Securities and Exchange Commission on Tuesday filed separate civil complaints against FleetBoston Financial Corp. subsidiaries Columbia Management Advisors Inc. and Columbia Funds Distributor Inc., alleging both allowed market timing of Columbia mutual funds, in violation of prospectus provisions prohibiting the practice.
Both complaints seek investor restitution, civil penalties and orders to halt timing in Columbia funds. The SEC's complaint, filed in U.S. District Court in Boston, also seeks to bar Columbia Management Advisors from acting as an investment adviser to any registered investment company.
According to the two complaints, executives at Columbia Funds Distributor, a registered broker-dealer and the principal seller of Columbia Management funds, arranged with at least nine institutional investors and individuals to enter into market-timing agreements. Among those named in Mr. Spitzer's complaint are hedge funds Ilytat LP, San Francisco; Ritchie Capital Management LLC, Batavia, Ill.; and Canary Capital Partners LLC, Secaucus, N.J.
Ilytat officials could not be reached for comment. An executive at Ritchie Capital did not return a phone call seeking comment by press time.
Also named was California attorney Daniel Calugar, owner of a Las Vegas broker-dealer firm called Security Brokerage Inc., which also has been implicated in market-timing arrangements with mutual funds managed by Franklin Resources Inc., San Mateo, Calif.; Alliance Capital Management LP, New York; and Massachusetts Financial Services Co., Boston Previous HedgeWorld Story.
In some cases, those agreements included quid pro quo in the form of so-called "sticky assets," or assets invested long-term in Columbia funds by the market timers. Those long-term assets increased the amount of assets in Columbia Management funds, generating increased advisory fees for Columbia Management, and more revenue for Columbia Funds Distributor, according to the complaints.
Among the 17 Columbia funds in which market timing is alleged to have occurred is the Young Investor Fund, which was developed for children and marketed as educational, according to the New York Attorney General's complaint.
Market timing involves quick in-and-out trades of mutual fund shares to take advantage of price changes in underlying securities before they can be reflected in the mutual fund share price. It is not illegal but can hurt the long-term share price of the mutual fund.
These agreements were made despite the fact that prospectuses for Columbia funds indicated that short-term and excessive trading were not allowed and over the objections of some Columbia portfolio managers, who said they felt the market timing would hurt ordinary shareholders, according to the two complaints.
One email from a portfolio manager, written in August 2000, complained about Ilytat's active trading of Columbia's Newport Tiger Fund, an Asian equity fund. The New York Attorney General's complaint, filed in New York State Supreme Court, alleges that Ilytat made nearly 350 round-trip trades--trades into and out of the fund--between April 2000 and October 2002. A number of those trades were made in the Newport Tiger Fund, an Asian equity fund, according to the complaint.
"Their [Ilytat's] active trading has increased and it has become unbearable," according to the email. "There will be long-term damage to the fund. Let's understand that they are not investors. They take advantage of the fund's delayed pricing mechanism which almost guarantees a risk-free return."
"Columbia managers and executives knew that making arrangements with market timers was harming long-term investors but they facilitated it because it was a lucrative source of fee revenues," Mr. Spitzer said in a statement.
The SEC's Peter H. Bresnan, acting district administrator for the commission's Boston office, said, "Columbia had one set of rules for small investors and another secret set of rules for certain big money players."
FleetBoston officials did not return calls seeking comment by press time.
Ilytat also placed timing assets in the Acorn International Fund between September 1998 and October 2002; in the Acorn International Select Fund between July 2000 and July 2001; in the Stein Roe International Fund between August and October of 2000; in the Newport International Equity Fund between April and September of 2000; and in the Columbia International Equity Fund between February and October of 2002, according to the complaint.
Ritchie Capital allegedly made more than 270 round trips in the Newport Tiger, Columbia Growth Stock and Newport Tiger funds between January 2000 and September 2003.
Canary arranged for timing through two intermediaries in the Columbia Growth and Income Fund, the Columbia Select Value Fund, the Columbia Growth Stock Fund and the Columbia High Yield Fund.
Canary also has been linked to market timing at mutual funds managed by Janus Capital Group Inc., Denver; Pacific Investment Management Co., Newport Beach, Calif.; Federated Investors Inc., Pittsburgh; the Canadian Imperial Bank of Commerce, Toronto; Alliance Capital Management LP, New York; Banc One Corp., Chicago; Bank of America Corp., Charlotte, N.C.; Strong Financial Corp., Menomonee Falls, Wis.; and INVESCO Funds Group Inc., Denver.
"By putting their own financial interests ahead of their clients' interests, this investment adviser and broker-dealer [Columbia Management and Columbia Distributor] violated their most basic duties and violated the trust that mutual fund shareholders placed in them," said Stephen M. Cutler, director of the SEC's Division of Enforcement.