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Get Four
|  | FEBRUARY 6, 2004
By Faith Arner The SEC Wrist-Slaps Another Fund Sun Life is the latest case where regulators have levied relatively painless penalties on a firm caught up in the mutual-fund scandal Mutual-fund companies caught in the unfolding probe of illegal or inappropriate trading at the expense of individual investors seem to be finding an unlikely ally in the Securities & Exchange Commission. So far, the SEC is setting a pattern of settling charges with only limited financial pain for firms that have been accused of allowing some investors to trade frequently in and out of funds at the expense of others. In the latest settlement, Sun Life Financial (SLF ) announced on Feb. 5 that its subsidiary, Massachusetts Financial Services (MFS) had reached a deal with the SEC and state securities regulators in New York and New Hampshire. Under the agreement, MFS will cough up $225 million -- $175 million as a payback to harmed shareholders and a $50 million fine -- and reduce fees by about $25 million annually over the next five years. Also, MFS CEO John Ballen and President Kevin Parke have been suspended from the business for nine months and six months, respectively. Both have also been barred from serving as director or officer of any financial adviser, such as MFS, for three years, and each will pay $315,000 in fines. As part of the deal, neither MFS nor its execs admit or deny wrongdoing. CRIME AND PUNISHMENT. No doubt relief is running through the halls of the firm's Boston headquarters. The penalty is peanuts for the country's 11th-largest mutual-fund group, with $140 billion in assets under management at the end of 2003. Parent Sun Life took a charge for the settlement of $221 million in the fourth quarter, but it still posted net earnings of $1.3 billion for 2003. The SEC has struck similar deals with others. So far, Alliance Capital Management Holding (AC ) has agreed to a fine of $250 million. Putnam Investments settled quickly in November, but a fine has yet to be determined. Experts say the financial penalty could be minimal because the damage to Putnam's shareholders is about $5 million -- far less than at MFS. Whether the penalty fits the alleged crime at MFS is hard to tell. Regulators have not disclosed how they calculated the damages. "Even the SEC or [New York State Attorney General Eliot] Spitzer can't really know whether they've pegged the disgorgement figure accurately because it's a very complicated matter," says Mercer Bullard, founder of FundDemocracy, a consumer-advocacy group, who adds: "There's no evidence [Spitzer or the SEC] have gone back and identified every trade and the amount lost to shareholders as a result." Says Peter Bresnan, acting district administrator from the SEC's Boston office: "We felt $175 million was a fair approximation of the harm." POST-RACE BETTING. Still, MFS will be able to put the scandal behind it rather easily and quickly -- and likely prevent an investor exodus. So far, so good on that front: Even though news of its transgressions broke in early December, MFS actually posted a net inflow of $800 million for the fourth quarter. Moreover, MFS has dodged culpability for alleged late trading. Such activity allows some investors to buy funds after the 4 p.m. market-close deadline, when news affecting companies or funds has been released. Other investors must wait until the market opens the following morning. Spitzer has likened the late-trading practice to betting on a horse race after it's over. And one internal estimate of the damage to investors from alleged late trading at MFS was $100 million. MFS says it doesn't know about any late trading involving its firm, but that it "intends to vigorously pursue restitution from the parties responsible for [any] such illegal late trading." The SEC also intends to pursue the perps. "We know who the late traders are, and we're going to find them and punish them," says the SEC's Bresnan. Many more fund firms, brokerages, and banks are under investigation in the ongoing scandal, so it's possible that the penalties will increase in future settlements. Meanwhile, it's hard to know how tarnished the mutual-fund industry's reputation might be. But so far, the financial penalties hardly put a dent in the industry's profits.  Arner is a correspondent in BusinessWeek's Boston bureau Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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