Mutual Fund Settles $50 Million Suit
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ALBANY, N.Y. (AP) – One of the nation’s oldest mutual fund management companies has agreed to pay $50 million to settle New York Attorney General Eliot Spitzer’s investigation into improper trading.
Spitzer had accused the Kansas City-based Waddell & Reed Financial Inc. of permitting illegal trading of its funds. The company, founded in 1937, agreed to adopt management reforms, pay $50 million in restitution to investors and reduce fees by $25 million over five years.
The settlement ends investigations by Spitzer, the federal Securities and Exchange Commission and Kansas Securities Administrator into three subsidiaries of Waddell & Reed, according to company spokesman Roger Hoadley.
Market timing of mutual funds, which involves rapid in-and-out trades, is not illegal but is prohibited by many funds because it can disadvantage ordinary shareholders by diluting the value of their shares. Late trading involves trades placed at that day’s closing price after the market closes.
Spitzer said he found secret agreements were made with mutual fund timers in which Waddell & Reed received extra fees for the trading advantage over most investors. Spitzer said the company’s senior management knew about the practice that hurt smaller investors and the prospectus created the “false impression” that the company was combatting the improper trading.
“The evidence in this case showed that company officials didn’t just look the other way at timing activities, they facilitated the transactions with full knowledge that small investors were being harmed,” Spitzer said.
The company, with $44.9 billion in total assets, didn’t admit or deny the allegations. The company had taken several measures since 2001 against market timing, officials said.
“These settlements have been in process for some time and relate to matters well in our past,” said Henry J. Herrmann, CEO of Waddell & Reed. “Our success in settling other legal and regulatory matters, and the elimination of the distraction they had caused, has already shown itself in the results of our business performance.”
This was the 19th settlement for Spitzer since he began the mutual fund investigation in 2003, targeting Canary Capital Partners. Investors have received $3.4 billion in restitution under the settlements, Spitzer said.
Waddell & Reed shares rose 68 cents, or 3.5 percent, to $20.29 during midday trading on the New York Stock Exchange. The stock has traded between $18.13 and $24.80 during the past 52 weeks.
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