State and federal regulators have announced the final terms of a $451.5 million settlement over allegations that the now extinct Invesco Funds Group and its sister company AIM Investments engaged in abusive trading practices.
The move puts an end to nearly a year of intense and time-consuming investigation and negotiation. Allegations that the firm struck cushy deals with preferred clients allowing them to trade rapidly in and out of funds ultimately cost several top Invesco executives their jobs, including former CEO Ray Cunningham.
The fine imposed on the two Amvescap affiliates marks the third-largest settlement in the mutual fund trading scandal to date, behind Bank of America-FleetBoston and Alliance Capital.
The dollar amount has been known since a preliminary settlement was reached in early September, which included civil penalties, investor reimbursements and management fee reductions. But Colorado Attorney General Ken Salazar provided more details as to the reforms it has imposed on AIM, which recently took over Invesco's fund operations.
"We are pleased that Invesco and AIM have stepped up and agreed to dramatically modify the way they conduct business," Salazar said in a statement. "Current and future shareholders in their mutual funds will benefit greatly from a new environment of full disclosure and a renewed commitment to do what is in the best interests of shareholders."
Under the terms of the agreement, AIM will name a truly independent chairman of the board of trustees, an individual with no prior ties to the company. The Houston-based fund shop will also face new requirements for disclosing fees and expenses to investors. AIM must hire a full-time senior officer or an independent consultant to ensure that the fees imposed on shareholders are reasonable and negotiated at arm's length.
Additionally, the company is required to implement more stringent controls to curtail market timing and prohibit sticky asset deals. Another stipulation of the deal is that AIM must retain an independent compliance consultant and conduct audits to ensure policies and procedures are followed.
As part of its joint settlement with regulators, Invesco will pay $325 million in disgorgement and civil penalties. In addition, Invesco will pay another $1.5 million to cover costs and legal fees for the attorney general's office as well as investor education and future enforcement activities. The payment is due on Nov. 8.
AIM Advisors and AIM Distributors will pay $20 million in disgorgement and an aggregate $30 million in civil penalties. Separately, New York Attorney General Eliot Spitzer, who has greater authority under the state's Martin Act, imposed a $75 million fee reduction on the two affiliated companies over the course of the next five years.
"These sanctions and reforms should make it clear that regulators will respond aggressively when fiduciaries enrich themselves at the expense of their clients," Spitzer said publicly last month.
"None of the costs of the settlements will be borne by the Invesco and AIM funds or fund shareholders," assured AIM President and Chief Executive Officer Mark Williamson, in a letter to shareholders.
The Not-So-Fab Four
Meanwhile, Cunningham, the erstwhile chief executive, reached his own settlement with regulators, one that requires him to pay a $500,000 civil penalty and $1 in disgorgement. He is banned from the mutual fund industry for a period of two years and prohibited from serving as an officer or director in the securities industry for five years.
In September, three other former Invesco executives, including one of its portfolio managers, agreed to pay a combined $340,000 in fines for their roles in the market-timing scheme, which timed more than $900 million of Invesco assets in 2003 alone, according to Spitzer's office. The trio, Timothy Miller, Thomas Kolbe and Michael Legoski, were barred from the industry for one year.
During the period from at least 2001 through July 2003, the four men collaborated to set up undisclosed arrangements with more than 40 entities permitting them to market time certain funds. Those hush-hush deals enabled the company to collect additional fees from the assets under management. However, the fund prospectuses explicitly discouraged market timing by stating that shareholders could only make up to four exchanges out of each fund per 12-month period.
Now that the settlement has been finalized, the $325 million fine will be paid to the SEC in two installments of $162.5 million and deposited into an escrow account set up by the Commission, where it will await distribution. The company's newly hired independent consultant must devise a plan for distributing the restitution payments by Jan. 6, 2005. The proposed distribution plan then will be submitted to the SEC for review no later than March 17, 2005 and any disputes must be resolved by May 20, 2005.
Next, the distribution plan will be published to the SEC's Web site for a 30-day public comment period. The settlement dollars will only be distributed to shareholders after the SEC has given final approval. This may include a formal notice to affected shareholders and a claims process, Salazar's office indicated. In short, the shareholders won't see any of that money for quite some time.