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Fremont Investment Advisors Settles Market-Timing, Late-Trading Charges

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SAN FRANCISCO (–Fremont Investment Advisors Inc. agreed to pay US$4.1 million and reform its corporate governance practices in order to settle charges brought by the Securities and Exchange Commission and New York State Attorney General’s Office that it allowed market timing and late trading of shares in its mutual funds.

Also as part of the settlement, former Fremont President and Chief Executive Nancy Tengler agreed to repay US$27,000, plus pay a civil penalty of US$100,000 and serve a six-month suspension from the investment industry. The SEC is continuing to litigate administrative penalties against Larry Adams, Fremont’s former vice president of institutional sales.

The settlement clears the way for Fremont to sell its US$2.8 billion in assets to Affiliated Managers Group Inc., Prides Crossing, Mass., which in July announced its intention to acquire Fremont’s assets via its Managers Funds LLC advisor subsidiary. Now that Fremont’s problems with the New York attorney general’s office and the SEC are resolved, the Affiliated deal is expected to close in the next few months, according to Fremont officials.

“Fremont Investment Advisors and our employees are committed to upholding the funds’ policies to prevent market timing and late trading, and we have worked diligently and cooperatively with the SEC and NYAG to resolve these issues,” Fremont Chief Executive E. Douglas Taylor said in a statement.

Fremont’s connection to the mutual fund market-timing scandal emerged as part of New York State Attorney General Eliot Spitzer’s investigation into Secaucus, N.J.-based hedge fund Canary Capital Partners LLC’s trading in mutual fund shares. That investigation led to discovery of market-timing arrangements at a number of large mutual fund firms, many of which have settled.

At Fremont, law enforcement officials and regulators noted that the firm’s prospectuses made it clear the funds did not allow market timing. In fact Fremont employed a “timing cop” to police the funds and block excessive trading. Several investors who made six or more trades into and out of Fremont mutual funds in a 12-month period between 2001 and 2002 were told by fund officials that their trading privileges had been terminated because such trading was counter to the funds’ long-term goals.

But at the same time, other so-called preferred investors were allowed to market time Fremont mutual funds, specifically its Global Fund and U.S. Micro-Cap Fund. In exchange for this ability, the investors agreed to put millions of dollars in long-term, or “sticky,” assets into Fremont’s New Era Value Fund, a relatively new fund established and co-managed by Ms. Tengler, according to the SEC and Mr. Spitzer’s office. As part of Fremont’s decision in 2003 to sell its assets, Ms. Tengler resigned as Fremont president and chief executive and was replaced by Mr. Taylor.

“By permitting select customers to engage in market timing and late trading, Fremont ignored its responsibility to treat all fund shareholders fairly and honestly,” said Helane Morrison, district administrator for the SEC’s San Francisco District Office, in a statement.

Mr. Adams wrote the agreement that allowed the market timing and provided for the placement of the sticky assets, according to the SEC. Litigation concerning his involvement continues, Ms. Morrison said.

The market timing–rapid in-and-out trading of mutual fund shares to take advantage of short-term price movements–generated some US$170,000 in fees for Fremont between 2001 and 2002 and also helped Ms. Tengler’s new fund grow significantly, according to the SEC complaint.

Separately, an unnamed Fremont employee allegedly allowed processing of mutual fund trade orders after the 4 p.m. ET market close but at the pre-market close price, a practice known as late trading. Late trading is not technically illegal, but regulators have treated it as if it were, saying it gives late traders an unfair advantage, since they receive the pre-market close, or “stale” price for their trades even though they are trading with post-market close knowledge of events or news that will affect the price the next day.

Without admitting to or denying the SEC’s findings, Fremont agreed to pay US$2.1 million in restitution and a civil penalty of US$2 million. That money will be distributed to investors in the funds harmed by market timing. Regulators maintain that market timing negatively affects ordinary mutual fund shareholders by reducing overall fund performance and generating trading fees that are passed on to other investors.

In addition, Fremont agreed to a number of corporate governance reforms designed to prevent future market timing. Among them, a chief compliance officer will review daily money flow reports for Fremont mutual funds, as well as all letters sent by the firm to market timers. Fremont also has crafted written policies for identifying and blocking market timers and all employees are required to sign a certificate saying they have read and understand the policies. And a new “Whistleblower Protection Policy” will provide employees with a secure and direct way to notify the firm’s legal department of potential violations of securities laws, questionable accounting or auditing practices or complaints about internal controls.

“The lesson from this long-running investigation is that you must not have one set of rules for privileged insiders and another set for everyday investors,” Mr. Spitzer said in a statement. “The mutual fund industry will only regain the public’s trust when it treats everyone fairly and with respect.”

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Contact Bob Keane with questions or comments at: [email protected].


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