Baron Capital of New York, the broker/dealer affiliate of mutual fund asset management firm BAMCO and the distributor of shares of four Baron Funds, has been sanctioned by the Securities and Exchange Commission. Also, Ronald Baron, 59, BAMCO's highly visible founder, chairman and chief executive, and two of the firm's traders were punished for their ill deeds.

In assessing a collective $2.7 million fine, the SEC charged that Baron Capital manipulated the closing price of a stock by repeatedly buying shares of the security just before the market close. The intent was to drive up the price of the security, for which the merger was contingent upon, the SEC alleges. The illegal manipulative practice is commonly known as "marking the close."

Baron agreed to settle the charges without admitting or denying the SEC's allegations. Under the sanctions, Baron Capital was issued a cease and desist order and must pay a $2 million fine. Baron himself was handed a $500,000 civil penalty. Baron's head trader Davis Schneider was fined $125,000 and then-trader Susan Blenke was fined $75,000.

In a statement released on April 29, in conjunction with the SEC's announcement of the settlement of the administrative proceedings, Baron conceded that the settlement was executed in the best interest of Baron Capital and its investors. "After extensive discussions with the SEC staff, Baron Capitol decided not to contest their view and settle the matter without admitting or denying the SEC's findings," noted the statement.

The mutual fund industry's top regulator charged that in October of 1999, Baron ordered his firm's two traders to buy, on successive days, shares of Southern Union Company of Wilkes-Barre, PA. Southern Union is a natural gas utility that traded on the New York Stock Exchange. In most cases, the purchase orders were executed just a minute or two before the close of the exchange, with the intent of influencing the stock's closing price, said the SEC.

Four months earlier, Southern Union had announced its agreement to merge with Pennsylvania Enterprises, a natural gas energy company, for a total of $35 per share. The merger was expected to win the necessary regulatory blessing and close in early November 1999.

As part of the agreement, at the merger's consummation shareholders of Pennsylvania Enterprises were to exchange their shares for shares of Southern Union, plus receive some cash consideration. The amount of shares versus cash investors received depended upon the average closing price of Southern Union's stock for 10 consecutive trading days -- commonly referred to as the "pricing period" -- between October 19 and November 1, 1999. But one day before the pricing period was to begin, shares of Southern Union hit a six-month low of $17.625. If the price fell below a threshold of $17.30 per share, the merger deal could be terminated by Pennsylvania Enterprises.

The SEC charged that in taped phone conversations, beginning on October 19 and during the pricing period Baron directed the traders to purchase large amounts of Southern Union stock in hopes of driving up the stock price. The SEC claimed that on seven of the 10 trading days, Baron's trades were the closing day trades in the stock.

Baron confirmed that its affiliates had been investing in Southern Union for its clients since 1995. According to the SEC, as of October 15, 1999, Baron and affiliates owned more than 10% of Southern Union's outstanding shares.

Baron appears anxious to put this 3-1/2 year-old problem behind it so it can get back to business as usual. For Baron, that means getting back to picking and managing small to medium sized growth companies under a long-term time horizon, with the hopes of garnering returns of 50% within two years.

In addition to managing separate account assets for high-net-worth and institutional investors through its Baron Capital Management subsidiary, BAMCO, the group's mutual fund management unit, manages $4.1 billion among its four current funds, according to Morningstar. The Baron Asset Fund is the firm's flagship and largest fund with $1.8 billion under management. The fund, which debuted in 1987, has seen an annualized return of 10.9% from inception through March 31, 2003. Its sibling $1.4 billion Baron Growth Fund has returned an even heftier average of 16% per year since its 1995 debut. The Baron Small Cap Fund, with a lesser $817 million in its coffers, has rewarded investors with an annualized return of 6.5% since its 1997 inception.

A fourth fund, the Baron iOpportunity Fund, which invests in Internet-related companies and was launched just weeks before the dot-com bubble burst in 2000, has lost an average of 23.6% per year since it debuted. Baron also manages a fund used within an annuity product.

Next on the agenda for Baron is a new fund, which was originally registered this past February and is awaiting final approval from the SEC. The Baron Partners Fund is moving into the public fund realm after having spent its first 11 years as a limited partnership investment pool. The $116 million fund, which will take both long and short positions in securities, is 40% owned by Baron senior executives.

Despite any losses, Baron's stock-picking prowess and at least three of the funds' consistent performance have forged a degree to loyalty among Baron's estimated 500,000 fund shareholders that is largely unrivaled in the fund industry.

Each year, many of them attend the daylong annual Baron investment conference in New York City. The conference features many of the top executives of the companies Baron invests in. The event which features a buffet lunch (even kosher fare is available) is free to Baron's investors. The event has turned into quite a shindig, all paid for out of Ron Baron's own pocket.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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