Mutual fund giants Invesco and AIM Advisors yesterday coughed up $450 million to settle charges that they bilked investors by cutting shady deals with favored customers.
The two funds, both units of Britain’s Amvescap, made the deal with the Securities and Exchange Commission, New York Attorney General Eliot Spitzer and Colorado Attorney General Ken Salazar.
Invesco Funds Group, which originally labeled the charges “without merit,” will pay damages of $215 million and a penalty of $110 million while AIM Advisors will pay damages of $20 million and a penalty of $30 million.
The two companies agreed to reduce fees by $15 million a year for the next five years – an agreement the funds struck solely with the New York attorney general.
Spitzer and the SEC filed civil fraud charges against Invesco in December 2003, as well as against the firm’s president, Raymond Cunningham, alleging that the company allowed “dozens” of traders to market-time – trade in and out of the mutual fund rapidly, hurting the funds’ long term returns – in violation of the company’s stated policy discouraging such practices.
“This case stood out as one in which there was a huge volume of timing, a high-level understanding of that fact and a well-documented appreciation at the company that it was harmful to investors,” said David Brown, head of the attorney general’s investor protection bureau.
Spitzer’s December 2003 complaint laid out in explicit detail not only the extent of the trading, but also top management’s knowledge of the harm it was causing investors.
“Those at IFG (Invesco Funds Group) who deal with market timers estimate that between $750 million and $1 billion of the assets in the Invesco Mutual Funds at any given time are attributable to market timers,” said a memo to company chief Cunningham from Jim Lummanick, the firm’s top compliance officer.
The Jan. 15, 2003 memo outlines how such activities violate the firm’s stated limits on such activities, as well as how such activities might “not be the same thing as acting in the ‘best interests of the Fund and its shareholders.’ ”
Cunningham and two of the portfolio managers associated with the deals left the firm in July.
The SEC and attorney general still have civil investigations pending against Cunningham while the other executives have settled their cases.
The firms agreed to a set of corporate governance reforms as well as the fines and penalties.
All but the $75 million in fee reductions will go to an investor restitution fund.