Alger Settles Market Timing Case For $45 Million
NEW YORK, NY (January 18, 2007)—Attorney General Andrew M. Cuomo announced a $45 million settlement with mutual fund manager Fred Alger Management, Inc., resolving all allegations that the firm engaged in a massive mutual fund timing scheme to benefit favored investors at the expense of typical shareholders.
Under the agreement, Alger will pay $30 million in restitution and a forfeiture of ill-gotten gains to injured investors, and $10 million in civil penalties. In addition, the firm has agreed to make $5 million in reduction of fees charged to investors over a five-year period.
Alger also agreed to adopt significant reforms and corrective measures including: new requirements for disclosure to investors of expenses and fees, new standards for board independence, greater board and adviser accountability, and a commitment to hire a senior officer to ensure that fees charged by the funds are negotiated at arm’s length and reasonable.
“The Attorney General’s office will continue to aggressively prosecute corruption in the financial services industry,” Cuomo said. “Investment firms that violate the rules will be sued or prosecuted, and settlements will demand institutional reforms when appropriate.”
Market timing involves trading that captures short-term profits for sophisticated investors at the expense of long-term shareholders. Market timers also harm the mutual fund’s shareholders by increasing the fund’s transaction costs, which are spread among all shareholders.
Alger’s prospectuses contained a limit of six trades per year designed to prevent timing. But this was routinely waived for hedge funds and other big investors interested in timing. For example, one timer engaged in 228 trades in 2001 alone. Over a five-year period, Alger allowed thousands of timer trades in excess of its prospectus limits, causing its long-term customers tens of millions of dollars in damages.
Alger provided two of its preferred hedge fund clients, Veras Capital Partners, L.P. and Canary Capital Partners, L.L.C., with an additional form of undisclosed special treatment by providing them material, non-public information to assist them in their trading strategies.
Alger also benefited from market timing by selling the right to market time in return for deposits that resulted in additional fees.
Alger’s employees were acutely aware of the harm caused by this timing activity. One portfolio manager wrote:
I understand that you may not want [to] jeapardize [sic] your relationship with the [timer] but there needs to be some limit on the number of times and/or amounts being moved in and out. Please help-this has become a large daily frustration which is hurting the performance of all the small cap funds.
When James P. Connelly, Alger’s former Vice Chairman was asked by a subordinate about waiving the high fees that Alger charged for its money market account, he replied:
Tell me why we should or would? It is used for timers mostly and idiots otherwise. Why should we not make money?
Even Daniel Chung, Alger’s current President, complained about the market timers:
Just went 8% negative cash…is there a big markettimer [sic] withdrawal today? I feel obligated to sell into this, as I have not ever had the fund that negative
In another e-mail, after repeated complaints by an Alger portfolio manager about timing, Chung wrote to Connelly and another senior Alger executive:
Can we get the market timers trimmed back again? It is getting out of control. I think the amount is over 20% of the fund...? 10% would be more like it.
On October 16, 2003, Connelly pled guilty to the crime of Tampering with Physical Evidence, a Class E felony. In a related proceeding instituted by the U.S. Securities and Exchange Commission, Connelly paid a $400,000 civil penalty and was barred for life from the mutual fund industry for his role in Alger’s market timing scheme.
Cuomo thanked the Northeast Regional Office of the SEC for its participation in the investigation. “This was a cooperative investigation between the Attorney General’s office and the SEC.” Cuomo said.
The Alger settlement was handled by Assistant Attorneys General Peter Dean and Maria Filipakis of the Investment Protection Bureau, with assistance provided by Economist Hampton Finer of the Attorney General’s Public Advocacy Division.