Attorney General Eliot Spitzer today filed a complaint against mutual fund manager J. & W. Seligman & Company and its current President, Brian Zino, alleging that the firm sanctioned numerous secret timing arrangements that cost small investors $80 million.
The lawsuit, filed today in State Supreme Court in Manhattan, refutes a claim by company officials that there was only limited timing activity at Seligman. The company made that claim last year, saying it had investigated itself thoroughly and found only four cases of timing arrangements that caused $2 million in damage to its investors.
The Attorney General’s Office disagreed and sought a court order requiring Seligman to provide documents and make employees available for testimony. The court granted that request and the Attorney General’s office uncovered 35 previously undisclosed agreements with mutual fund timers. During the period from 1998 to 2001, Seligman tracked and tolerated the activities of these "special agreements" but did little or nothing to shut them down. For example, one timer was allowed to conduct 400 "round trip" exchanges in six Seligman funds during this period – a time when regular investors were limited to eight exchanges per fund each year.
"While it is certainly within a company’s rights to continue to contest the evidence, the record shows that there was a clear breach of fiduciary duty at Seligman and that the company’s damage estimates are inadequate," Spitzer said.
Spitzer said that the company’s claim to have investigated itself was disingenuous because it focused on a conveniently limited time frame, from 2001 to 2003. When the Attorney General’s office reviewed the "special arrangements" from the earlier time period noted above, investigators found many more timing arrangements that harmed small investors.
The evidence also shows that senior managers were well aware of the improper trading and its harmful effect on investors. (See attached.)
The Attorney General’s lawsuit, which names the company, its president, its fund distributor and shareholder services agent, seeks injunctive relief, disgorgement of fees and profits, and restitution, as well as penalties.
The Attorney General’s case is being handled by Assistant Attorney General Verle Johnson, under the direction of Enforcement Section Chief Maria Filipakis and Bureau Chief David D. Brown IV of the Investment Protection Bureau, with assistance provided by Economist Hampton Finer of the Attorney General’s Public Advocacy Division.
