Columbia Allowed $2.5 Billion in Timing

February 25, 2004, 1:00 a.m. EST 2 Min Read

A pair of regulators announced civil charges against FleetBoston yesterday, offering damning evidence that two of the fund shops subsidiaries allowed $2.5 billion worth of market-timing business throughout 17 of its funds.

The Securities and Exchange Commission and New York Attorney General Eliot Spitzer each brought separate charges against Columbia Management Advisors and Columbia Funds Distributor.

Regulators allege FleetBoston allowed preferred customers to market time its funds, contrary to prospectus language. Columbia allowed these arrangements to increase assets, and, thereby, management fees. Some of the deals stipulated assurances for "sticky assets." One of the targeted funds was the Young Investors Fund, for children.

Regulators would not comment on a potential settlement, but Brad Maione , a spokesman for Spitzers office, told MME the $2.5 billion worth of timing trades is a "very significant" amount.

To put that dollar figure in perspective, Massachusetts Financial Services had reportedly allowed $1.3 billion worth of timing activity in its funds and eventually ended up agreeing to a settlement worth $351 million, which included a reduction in fees.

"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 said in a statement, characterizing this as "a massive mutual fund timing scheme."

E-mail Spoke of Long-Term Damage

The firms management was well aware of the damage done to shareholders, Spitzer said. One of Columbia portfolio managers wrote to the president of Columbia Funds Distributor that "trading has increased and it has become unbearable. There will be long-term damage to the fund." Despite the raised concerns, Columbia did nothing or, in some instances, had timers reduce their in-and-out activity, but not eliminate it.

"By putting their own financial interests ahead of their clients interests, this investment adviser and broker/dealer violated their most basic duties and violated the trust that mutual fund shareholders placed in them," said Stephen M. Cutler, the SECs director of the division of enforcement, in a statement. "The Commission will continue aggressively pursuing companies which, like these defendants, allow harmful trading in their own mutual funds."

Charges were not unexpected for FleetBoston, as the firm said in January that it had received a Wells notice from the SEC, indicating an enforcement action was on its way. However, FleetBoston had previously indicated the abuses were not widespread. While reporting its fourth quarter financial results, the firm said that it believed the allegations related to a "limited number" of arrangements and entities and took place only in one international fund and two domestic funds.

FleetBoston did not respond to the charges by press time.