DENVER (HedgeWorld.com)–Add Invesco Funds Group Inc. to the growing list of mutual fund companies that have been charged with allowing market timing or late trading of mutual fund shares.
But the fund company, a subsidiary of AMVESCAP plc, London, isn’t going down without a fight.
The U.S. Securities and Exchange Commission and New York State Attorney General Eliot Spitzer on Tuesday leveled federal and state civil charges against Invesco Funds Group and its chief executive, Raymond R. Cunningham.
Both complaints allege Invesco allowed selected institutional investors, including the hedge fund Canary Capital Partners LLC, Secaucus, N.J., to engage in timing trades of Invesco mutual fund shares, in violation of policies outlined in Invesco fund prospectuses.
Mr. Spitzer’s complaint alleges those timing trades, by Canary and others, totaled more than US$900 million between late 2001 and July of this year and cost ordinary Invesco shareholders about US$161 million in fees during that time, plus costs associated with share dilution and other effects. Invesco manages roughly US$18 billion in 48 mutual funds.
Allowing market timing, or quick in-and-out trades of mutual fund shares in order to arbitrage fund net asset values, amounted to fraud on the part of Invesco and Mr. Cunningham, since the fund prospectuses sent by the company did not mention Invesco’s market timing program and in fact gave the impression that Invesco “monitored and discouraged” timing, according to Mr. Spitzer’s complaint.
In a statement issued by AMVESCAP, officials said the actions by the SEC and Mr. Spitzer’s office were not merited and that neither Invesco Funds nor Mr. Cunningham had “engaged in wrongful conduct.”
Company officials blasted the use of “selective civil enforcement actions” and said they supported instead industry-wide guidance from the SEC. Market timing, they added, is not illegal.
Daily liquidity, they said, is a “fundamental feature of any open-ended mutual fund, and absent clear regulatory guidance, should not be needlessly restricted.”
Invesco directed market timers into funds that “would not be adversely affected” by timing activity and kept close track of it, thereby controlling market timers and protecting shareholders, according to the statement.
An internal Invesco investigation documented around 400 instances in which the company closed market timing shareholder accounts when timing activities raised concerns.
AMVESCAP officials also said allowing market timing was within the guidelines of the funds’ prospectuses.
But not everyone at Invesco thought the company had its market timers under control or that that the prospectuses clearly allowed it, according to memos and emails released by Mr. Spitzer’s office as part of its complaint.
Mr. Spitzer’s complaint–the most detailed of the two–cites emails sent between Mr. Cunningham and other Invesco executives, including Chief Investment Officer Timothy Miller, Senior Vice President for National Sales Thomas Kolbe and Michael Legoski, who monitored market timers and closed out those with whom the fund chose not to do business anymore.
“The evidence in this case speaks for itself,” Mr. Spitzer said in a statement.