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Under the terms of the $4.146 million settlement, FIA has agreed to pay $2.146 million in restitution and disgorgement to injured investors and $2 million in civil penalties.
FIA, located in San Francisco, is a mutual fund advisor to 12 mutual funds with approximately $3 billion in assets under management as of March 31, 2004.
"The lesson from this long-running investigation is that you must not have one set of rules for privileged insiders and another set for everyday investors," said Attorney General Spitzer. "The mutual fund industry will only regain the public's trust when it treats everyone fairly and with respect."
Market timing activity within the Fremont Funds came to Attorney General Spitzer's attention during his investigation of Canary Capital Partners in the summer of 2003. Since then, coordinated investigations by state and federal regulators revealed that from January 2001 to October 2002, FIA permitted preferred investors to engage in improper, frequent short-term trading of shares of the Fremont Global Fund and U.S. Micro-Cap Fund at the expense of other fund shareholders. One of the agreements required a quid pro quo: in order to receive permission to time the U.S. Micro-Cap Fund, the timer had to make an investment of "sticky" assets in Fremont's New Era Value Fund, a relatively new fund co-managed by the then-president and chief executive officer of FIA.
The agreements that FIA made with timers were not disclosed to long-term investors. On the contrary, the prospectus for the Fremont Funds has stated since February 2000 that: "Fremont does not permit excessive short-term trading, market-timing, or other abusive trading practices in our Funds. These practices may disrupt portfolio management strategies and harm fund performance. To minimize harm to the Funds and their shareholders, Fremont reserves the right to reject any purchase order (including exchanges) from any investor we believe has a history of abusive trading or whose trading in our judgment, has been or may be disruptive to the fund. Fremont defines abusive trading practices as making six or more complete exchanges -- into and out of -- one fund within a 12-month period."
At the same time that certain investors were permitted to time Fremont funds, other investors who made six or more complete exchanges in a year were informed by letter that their trading privileges were being terminated and that "Excessive and unpredictable trading hinders a fund manager's ability to pursue the fund's long term goals."
In addition to the market timing permitted by FIA, an employee of FIA allowed a brokerage firm to engage in late trading, the illegal practice by which an order to buy or sell is placed after the New York Stock Exchange closes at 4:00 p.m. Eastern Time, but the trade is made at a price based on the fund's Net Asset Value prior to 4:00 p.m. Eastern Time.
FIA has also agreed to significant corrective measures designed to create greater board and advisor accountability and to prevent the kinds of abuses that gave rise to this investigation.
The Attorney General's investigation was handled by Assistant Attorneys General Verle Johnson and John Henry, under the supervision of David Brown, Chief of the Attorney General's Investment Protection Bureau, with assistance provided by economist Hampton Finer of the Attorney General's Public Advocacy Division.
