Regulators charged Invesco Funds Group Inc. and its chief executive with civil fraud on Tuesday in the rapidly expanding mutual fund trading scandal.
In separate filings, New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission accused Raymond Cunningham and his Denver-based company of defrauding shareholders by allowing certain big clients to engage in market timing — frequent, short-term trading that skimmed profits from long-term shareholders.
According to the complaints, Cunningham and other executives set up a system to attract big-money market timers in 2001. The system flourished, despite complaints from portfolio managers and other employees that shareholders were being harmed.
Authorities estimated that market timing of Invesco funds totaled approximately $900 million in assets at the company in 2003.
"IFG and its CEO willingly sacrificed the interests of mutual fund shareholders when market timers dangled the prospect of higher management fees in front of them," said Stephen M. Cutler, director of the SEC's enforcement division. "By granting special trading privileges to selected customers, they readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds' prospectus disclosures on market timing."
Invesco Funds denied any wrongdoing Tuesday and said it would "vigorously" contest any charges against the company or its employees.
Regulators are seeking the return of profits made from the market timing as well as civil penalties.
The investigation of the mutual fund industry has already resulted in complaints against other well-known fund companies, including Putnam Investments and the Pilgrim Baxter fund family. Others, including Strong Financial Corp. and Alliance Capital Management, have acknowledged that market timing occurred but have not been charged.
Market timing is not illegal, but is strictly limited by most fund companies because it can skim profits from longer-term shareholders and increase transaction fees. Authorities contend that funds that prohibited or restricted such trades but then made selective exceptions for big clients, such as hedge funds, committed fraud.
The prospectuses for Invesco funds officially limited trades to four a year, but authorities allege exceptions were made for big clients, including Canary Capital LLC, the hedge fund operator who agreed to pay $40 million earlier this year to settle a complaint brought by Spitzer's office alleging improper fund trading.
"Invesco and its officers committed fraud and violated their fiduciary duties both by allowing Invesco funds to be timed and by concealing their timing arrangements from the investment public," the New York state complaint alleged. "The damages from this fraud are the fees that Invesco collected from the unwitting long-term investors in the funds Invesco turned over to timers — approximately $160.8 million, plus the dilution and other costs that the timing activity visited on these customers."
The filings allege that between June 2001 and June 2003, Canary made roughly $50 million — or a 110 percent return — market timing the Invesco Dynamics fund, while long-term shareholders lost 34 percent.
The Invesco Dynamics fund was marketed to children and families, according to the complaint.
Invesco is owned by London-based Amvescap PLC, which also operates the AIM and Atlantic Trust brands. Amvescap had $345.2 billion in funds under management as of Sept. 30.