The Commission ordered Alliance Capital to pay $250 million, consisting of $150 million in disgorgement and $100 million in penalties. All of the money will be distributed to the shareholders harmed by Alliance Capital's market timing arrangements. The Commission also ordered Alliance Capital to undertake certain compliance and fund governance reforms designed to prevent a recurrence of the kind of conduct described in the Commission's Order. The reforms will enhance the independence of the mutual funds' boards and strengthen oversight of Alliance Capital's compliance with the federal securities laws.
The Commission's Order finds that Alliance Capital entered into arrangements permitting market timing (short-term trading to exploit pricing inefficiencies), in certain of its mutual funds. In exchange, Alliance Capital solicited from these market timers long-term investments, so-called "sticky assets" or "legit assets," in its hedge funds and mutual funds. By virtue of these arrangements, Alliance Capital reaped additional management fees, but exposed its mutual funds to what it recognized as potential adverse effects of market timers. Alliance Capital breached its fiduciary duty to those funds and misled those who invested in them.
Stephen M. Cutler, Director of the SEC Division of Enforcement, said: "Alliance Capital violated the first rule for investment advisers - to protect the interests of the client. A violation of this fundamental trust warrants a most severe sanction, and the SEC's order reflects that. The size of the payment - the largest ever by a mutual fund adviser - also ensures full compensation to investors injured by these timing arrangements."
Mark K. Schonfeld, Associate Director of the Northeast Regional Office, said: "Advisers who put their own interests ahead of their clients' will pay a steep price. This resolution also brings real justice - every dollar of disgorgement and penalty will be returned to investors injured by the timing arrangements."
The Commission's Order makes the following factual findings:
- At their height in 2003, Alliance Capital arranged over $600 million in market timing in its mutual funds. Its single biggest timer, Daniel Calugar, owner of Security Brokerage in Las Vegas, Nevada, peaked at $220 million of timing capacity in certain mutual funds; in exchange, Mr. Calugar invested in hedge funds run by some of the same portfolio managers overseeing the mutual funds. For example, Alliance Capital granted Calugar $150 million timing capacity (the right to make multiple roundtrip trades up to $150 million each) in the AllianceBernstein Technology Fund in return for a $30 million investment - a 5:1 ratio - in a hedge fund managed by the same portfolio managers.
- Alliance Capital solicited shareholder approval to lift a restriction on futures trading in one of the funds by means of a misleading proxy. Alliance Capital failed to disclose that one reason for seeking to lift the restriction was to enable the portfolio manager to manage better the cash flows resulting from market timers.
- Alliance Capital provided confidential information about the portfolio holdings of certain mutual funds to one of the timers, Canary Investment Management. The disclosure enabled Canary to profit from market timing in declining markets.
Alliance Capital consented to entry of the Commission's Order without admitting or denying the findings.
In accepting the settlement, the Commission considered Alliance Capital's cooperation in this investigation, including reporting its discovery of possible misconduct to the Comission promptly, conducting a thorough and independent internal investigation, sharing the results of that investigation with the staff, obtaining the resignations of certain supervisory personnel and others, and implementing certain remedial actions.
The Commission's settlement does not require Alliance Capital to offer fee discounts to its mutual fund customers. In the attached statement, the Commission discusses why such relief would not serve its law enforcement objectives in this case.
The Commission's investigation of Alliance Capital and this enforcement action have been coordinated with the New York Attorney General's Office.
The Commission's investigation is continuing.
