Alliance Capital Management Holding LP, the largest publicly traded U.S. money manager, suspended two employees after uncovering "conflicts of interest" in short-term trading of mutual fund shares.
New York-based Alliance suspended the manager of the $3.3billion AllianceBernstein Technology Fund as well as a hedge fundmarketing executive, the company said in a statement. Alliance alsoformed a committee comprise of independent board members to reviewthe situation after being contacted by market regulators.
"What troubles me is Alliance is a leader in selling hedgefund products so the fact that their sales team may have donesomething wrong is a 'red flag' concern for other asset managersexpanding in this area," said Geoff Bobroff, an industryconsultant in East Greenwich, Rhode Island.
New York Attorney General Eliot Spitzer and the Securities andExchange Commission are spearheading the biggest investigation ofthe $6.9 trillion mutual fund industry since Congress passed theInvestment Company Act of 1940. Spitzer and the SEC have demandedinformation about trading practices from scores of fund companies.
Spitzer on Sept. 17 charged a former Bank of America Corp.broker with grand larceny and securities fraud for allegedly givingthe Canary Capital Partners LLP hedge fund an illegal edge overother investors in trading mutual fund shares. Bank of America,based in Charlotte, North Carolina, has dismissed at least fiveemployees since Spitzer filed his initial complaint on Sept. 3.
Spitzer has charged that Canary Capital was involved in"illegal trading schemes" with Bank of America, as well asChicago's Bank One Corp., Janus Capital Group Inc. in Denver andStrong Capital Management Inc. of Menomonee Falls, Wisconsin.
'Reprehensible'
Some of the alleged improper trading involved so-called markettiming in which investors exploit anticipated changes in sharevalues by buying and selling shares within a day. Most mutual fundstell investors they discourage short-term trading.
SEC Chairman William Donaldson said on Sept. 3 that theconduct alleged by Spitzer "is reprehensible and there is no placefor it in our markets."
An Alliance fund was among those that Canary Capital used forits trading strategies, according to trading records released bySpitzer. Canary sold shares of Alliance Growth & Income Fund andinvested the proceeds in an Alliance money market fund in a latetrade submitted at 6:31 p.m. on Jan. 13, according to Spitzer.
Officials at Alliance, which oversees more than $425 billionfor clients, have previously declined to answer questions about whyits fund appeared on Spitzer's list or whether it had anarrangement with Canary.
Investors withdrew a net $1.9 billion from Alliance's stockand bond mutual funds during the first eight months of this year,according to Financial Research Corp. Alliance ranks as America's24th biggest mutual fund manager by Boston-based FinancialResearch.
Lawsuits
The suspensions at Alliance, a unit of French insurer Axa SA,follow the charges against the Bank of America broker as well as a$2 million fine levied against Morgan Stanley by the NationalAssociation of Securities Dealers for allegedly using forbiddenincentives to encourage the sale of mutual funds.
Putnam Investments, the U.S. mutual fund company with thebiggest customer withdrawals this year, has been subpoenaed byMassachusetts regulators in a probe of improper trading.
Officials at Bank of America, Bank One, Janus and StrongCapital have said they intend to reimburse shareholders who mayhave suffered losses from any improper trading. Lawyers have filedclass-action suits against the four companies claiming theybreached their fiduciary responsibilities by allowing CanaryCapital to engage in illegal mutual fund trading.
