Federated Investors has reported a 25% decline in second-quarter profit partly because of a charge the Pittsburgh investment management company had to take related to improper trading.

Net income was $37.8 million, down from $50.6 million the year earlier. Federated said the results included a pretax charge to income of $6.6 million to cover legal, compliance and regulatory matters.

Two years ago, Federated said that several employees had accepted illegal, after-hours trades and that some of its officers permitted the hedge fund Canary Capital LLC to engage in improper trading.

Assets under management, however, grew by 11% in the quarter, to $204.7 billion, because of recent acquisitions and improved market conditions, the company said. The asset total was the highest for the end of any quarter at Federated. And revenue rose 4%, to $221.3 million, mainly due to its acquisition of Alliance Capital Management.

Federated has been among the big asset managers snapping up small fund families from banks and other financial institutions that are abandoning the proprietary fund business because they are too small (see MME 7/4/05.)

In June, for example, Federated bought $164 million of assets from Vintage Funds, owned by Amcore Financial of Rockford, Ill.

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Christopher Donahue, Federated's chief executive officer, said the company hopes to expand its money market business. Money market funds account for 42% of Federated's revenue. And inflows into the funds have been rising as their yields, boosted during the Federal Reserve's 13-month-old rate hike campaign, have begun to top 3%.

"We are optimistic about continuing to grow this part of our business, both organically and through acquisitions such as the Alliance transaction," Donahue said.

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