Nov. 26, 2003 — Federated Investors (FII) said it has uncovered several instances in which its employees made arrangements with customers that permitted frequent trading to occur as part of its ongoing internal review into mutual fund trading practices.
Federated indicated that one of these arrangements involved Canary Capital Partners LLC, or other related entities, in trading that took place between late January and early July, 2003.
The funds involved were Federated American Leaders/A (FALDX), Federated Capital Appreciation Fund/A (FEDEX), Federated Equity Income Fund/A (LEIFX), Federated Kaufmann Fund/A (KAUAX), Federated Max-Cap Index Fund/I (FISPX), and Federated Stock Trust (FSTKX).
Canary initially invested approximately $30 million. Later, the amount invested ranged from $80 million to $125 million. The Federated funds listed above had combined average assets of approximately $12 billion during the period. When Canary’s money was not invested in equity funds, it was held in a Federated money-market fund.
From January 22 to July 2, 2003, Canary made forty-six “round trip” transactions between the money-market fund and the six domestic equity funds. The largest number of “round trips” in a single domestic equity fund was fifteen, eight of which occurred in June.
Federated said its investigation also revealed two other trading arrangements involving investors in Federated high-yield funds.
The first arrangement, which occurred in the summer of 2002, permitted investments of not more than $20 million, and resulted in a total of six “round trip” investments over approximately one year, with total net gains of approximately $1.7 million. The second arrangement occurred in April, 2002, and permitted investment of approximately $10 million, for not less than 15 days, and not more than four times per year.
The funds involved were Federated High Income Bond Fund/A (FHIIX) and Federated High Yield Trust (FHYTX), which had combined average assets of approximately $2.2 billion during the period.
Both of these arrangements were terminated during the course of Federated’s internal review. Federated has accepted the resignation of the two officers who met with Canary to set up the arrangements with the Canary entities.
In addition, Federated identified Veras Partners, an investment advisor, which made late trades by placing orders over the phone between 4:00 p.m. and 5:00 p.m. on fifteen occasions. In those instances, the trades were accepted by a group of employees who did not have a “sufficient understanding” of the circumstances under which trades could be processed after 4:00 p.m.
Federated added that has found no evidence that the company’s senior executives improperly traded in any Federated funds.
In a letter to shareholders, Federated’s President J. Christopher Donahue said the company is “committed to taking remedial actions when, and as appropriate, including compensating the funds for any detrimental impact these transactions may have had on them.”