Dec. 11, 2003 — The Securities and Exchange Commission announced civil fraud charges against Milwaukee-based Heartland Advisors Inc. and several other entities and individuals for misrepresentations, mispricing and insider trading in two of Heartland Group’s high-yield municipal bond funds.
The Commission’s actions alleged violations in three primary areas — fund pricing, insider trading, and disclosure. The value of the funds, and a smaller related fund, dropped by approximately $93 million between Sept. 28 and Oct. 13, 2000, when Heartland sought to correct months of deliberate mispricing.
Charged in the civil action: Heartland Advisors Inc.; William Nasgovitz, its president and CEO; Paul Beste, its COO; Jilaine Bauer, its general counsel; Kevin Clark, its senior vice president of trading; Kenneth Della, its treasurer; Thomas Conlin and Greg Winston, former portfolio managers; Hugh Denison, an associated director; John Hammes, Gary Shilling, Allen Stefl, and Linda Stephenson, all independent directors; FT Interactive Data Corp., an independent pricing service; and Raymond Krueger, a friend and client of Nasgovitz.
In its complaint, the SEC charged Heartland, Nasgovitz, Beste, Bauer, Clark, Conlin, and Della with fraudulently pricing bonds in the funds. The Commission further alleged that the funds’ directors caused certain of Heartlands’ pricing violations when they failed to adequately follow up and resolve concerns about pricing issues that came to their attention.
The Commission charged FT Interactive with aiding and abetting and causing certain Heartland pricing violations.
The Commission also charged that Nasgovitz, Bauer, Winston, Della and Krueger engaged in insider trading in the shares of the funds when they sold their shares, and/or tipped others to do so, while aware that the funds had liquidity and pricing problems.
In addition, the SEC charged that Heartland, through Nasgovitz, Beste, Bauer, Clark, Conlin and Winston, misrepresented and omitted material facts in the offer and sale of shares in the funds. The misrepresentations and omissions related to the risks of investing in the funds, the credit research on the bonds purchased and held by the funds, the credit quality of the bonds held in the funds and the liquidity of the funds.
“There now appears to be a feeding frenzy among regulators to go after fund companies about market-timing and other issues,” said Louis Harvey, president of Dalbar Inc., a Boston-based mutual fund consultant. “When they go over millions of transactions conducted by thousands of employees, they will certainly find some mistakes or incidences of cheating. In this climate, no fund company will emerge with a clean bill of health.”
The SEC will seek permanent injunctions against the defendants as well as disgorgement, pre-judgment interest and civil penalties.
A spokesman for Heartland Advisors could not be immediately reached for comment.