The lawsuit alleging violations of the New York's Martin Act was filed today in coordination with the Securities and Exchange Commission, which is also pursuing civil charges against the firm.
Spitzer's complaint alleges that the company secretly promoted arrangements that permitted market timing by favored institutional clients in return for infusions of assets that generated management fees. The complaint describes "market timing" activities that took place in at least 16 different Columbia funds, in some instances in exchange for assurances that "sticky assets" would be placed in various funds. One of the funds that Columbia allowed to be targeted was its Young Investor Fund, a fund developed for children and marketed as "[t]he investment that's also an education."
These arrangements ran counter to prospectus representations Columbia made to investors that the funds did not permit short term or excessive trading.
"We will continue to pursue these cases in concert with the SEC," Spitzer said. "Columbia managers and executives knew that making arrangements with market timers was harming long term investors but they facilitated it because it was a lucrative source of fee revenues."
Spitzer's complaint details events dating from 1998 to August of 2003 and alleges that many of the Columbia Funds' portfolio managers and senior executives were well aware of the harm market timers posed to investors. For example, the portfolio manager of one Columbia fund wrote to the President of Columbia Funds Distributor that timers' "trading has increased and it has become unbearable. There will be long term damage to the fund."
But in response to communications expressing concern about excessive market timing, senior executives are alleged to have done nothing, or arranged for clients to reduce but not eliminate their market timing activities.
The Attorney General's lawsuit cites violations of New York's Martin Act, General Business Law and Executive Law. The suit seeks a halt to illegal mutual fund trading, disgorgement of fees, and fines and penalties from the corporation.
The Attorney General's case is being handled by Assistant Attorneys General George Tidona and John Henry, of the Attorney General's Investment Protection Bureau, under the supervision of Bureau Chief David D. Brown, IV.
Attachment:
State of New York v. Columbia Management Advisors, Inc.- Complaint