The agreement with Spitzer's office, which was announced simultaneously with agreements with the U.S. Securities and Exchange Commission and the New Hampshire Bureau of Securities Regulation, requires Massachusetts Financial Services Co. (MFS) of Boston to pay $175 million in restitution to injured investors, cut its management fees by an estimated $125 million over the next five years and pay a penalty of $50 million.
In addition, the MFS will hire a senior executive who will be responsible for ensuring that management fees charged to the funds are reasonable and are negotiated at arms length.
"This settlement levels the playing field for all investors in this mutual fund company," said Attorney General Spitzer. "From now on, market timers will no longer be permitted to profit at the expense of long term investors."
The investigation found that the company violated New York's Martin Act by stating in its published prospectuses and other materials that "The MFS funds do not permit market timing or other excessive trading practices." In fact, from at least late 1999 to 2003, some MFS funds were open to market timers and were being heavily timed.
Market timing is the rapid buying and selling of mutual funds by favored traders. Such trading harms long term holders of a mutual fund by diluting the value of funds held by them.
MFS benefitted from market timing by increasing the amount of money it managed and thereby the management fees it received, and by creating the appearance that it had more long term assets under management than was actually the case.
MFS operates approximately 140 mutual funds. As of August 2003, assets of MFS Funds totaled approximately $94 billion, of which some $44 billion was held in "unrestricted" funds which MFS secretly permitted to be timed. Timing activity accounted for an estimated five percent of these unrestricted funds.
The Attorney General's investigation determined that 10 funds at MFS were open to market timing, including: Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Emerging Growth Fund, MFS Research Fund, MFS Total Return Fund, MFS Money Market Fund, MFS Cash Reserve Fund, MFS Government Securities Fund, MFS Government Mortgage Fund, and MFS Bond Fund.
The case was handled by Assistant Attorney General Roger Waldman under the supervision David Brown, Chief of the Attorney General's Investment Protection Bureau.
