Secret Mutual Fund Timing Arrangements Exposed At Seligman

Attorney General Spitzer today commenced a legal proceeding advancing an investigation of illegal trading practices at the Seligman family of mutual funds.

In a court filing, the Attorney General cites previously undisclosed evidence of market timing at the New York City-based J. & W. Seligman & Company and asks the court to order the production of additional information relating to mutual fund timing activities at the firm.

"The evidence set forth in today's filing shows an extensive market timing program that appears to have been authorized by top executives," Spitzer said. "While the company has acknowledged allowing some improper market timing, the full extent of the problem at Seligman has not been disclosed to investors."

"Our action is designed to ensure that Seligman is held accountable for actions that clearly harmed shareholders," the attorney general said.

According to the filing, the attorney general's investigation to date has revealed that Seligman entered into at least a dozen secret mutual fund timing arrangements. These arrangements were approved by Seligman's senior management, including, on at least one occasion, the company's current president. The arrangements violated limitations set forth in the company's prospectuses.

The existence of the arrangements was well-known internally and prompted concerns from compliance officials. For example, in one e-mail circulated to senior executives, the arrangements were said to "loot percentage points in total return from the funds" and harm typical small investors.

The compliance official continued: "[Market timing] is a ticking time bomb for the entire mutual fund industry, set to go off the day the press realizes that fund companies routinely sell the returns earned by the shareholders of their funds to short-term traders."

According to the filing, Seligman's top management continued to allow fund timing despite these and other warnings.

Earlier this year, Seligman announced a settlement with its funds to compensate investors harmed by market timing activities. Under the terms of that settlement, the company made restitution of approximately $2 million, plus a fee reduction valued at $4 million. But the filing indicates that the funds may have suffered up to $80 million in damages from market timing transactions sanctioned or tolerated by senior management. A complete investigation will yield a more accurate calculation of shareholder losses.

The Attorney General has also sought to review the way Seligman set fees and expenses for its funds. In spite of poor performance rankings, Seligman is the nation's fifth most expensive family of funds. In some instances, the company charges its retail fund customers more than twice what it charges institutional customers for the same services.

The filing names as respondents the Seligman fund management company as well as its chairman, president, and former chief investment officer, the funds' distributor and shareholder services agent.

The Attorney General's case is being handled by Assistant Attorneys General Charles Caliendo, Maria Filipakis, and Verle Johnson, under the direction of David D. Brown IV, Chief of the Investment Protection Bureau, with assistance provided by Economist Hampton Finer of the Attorney General'sPublic Advocacy Division.

Attachments:

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