Attorney General Eliot Spitzer today announced an agreement with one of the nation’s oldest mutual fund management companies to settle charges that the firm permitted illegal trading of its funds.
Under the settlement, Waddell & Reed, Inc., based in Kansas City, agreed to pay $50 million in restitution to investors and make fee reductions totaling $25 million over the next five years. The company also will adopt a series of management reforms.
"The evidence in this case showed that company officials didn’t just look the other way at timing activities, they facilitated the transactions with full knowledge that small investors were being harmed,” Spitzer said.
Spitzer’s investigation found that Waddell & Reed managers had entered into secret agreements with mutual fund timers. Under these agreements, the timers paid extra fees to Waddell & Reed in exchange for trading privileges that were denied to typical investors. Specifically, in exchange for fees ranging from 1/4 percent to 1 percent of the timers’ money, the company exempted the timers from trading limits and other anti-timing policies put in place to protect long-term investors.
Investigation also determined that Waddell & Reed’s senior management knew that timing activity was harming the firm’s small investors, and yet the company did nothing to stop the harmful activity for a period of 18 months. During that time, the Company's prospectus created the false impression that Waddell & Reed vigorously policed timing activity.
Under the agreement, Waddell & Reed will increase efforts to halt market timing, take steps to ensure that fees charged to investors are negotiated at arm’s length, establish an independent board of directors, and improve disclosure of fees and expenses to investors.
Waddell & Reed was founded in 1937 and manages more than $44 billion in assets.
The investigation leading to the settlement was conducted in coordination with the U.S. Securities and Exchange Commission.
The Waddell & Reed agreement is the 19th settlement since the Attorney General’s Office began th a probe of improper mutual fund trading activity in July 2003. To date, these settlements have resulted in more than $3.4 billion in restitution for investors.
The case was handled by Assistant Attorney General Roger Waldman of the Investment Protection Bureau under the supervision of Bureau Chief David D. Brown, IV.
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