Janus Capital has reached agreements in principle with regulators that will cost the firm more than $226 million in restitution, fines and reduced fees for illegal market-timing activity at the firm, the fund shop said last week.
Under terms of the agreements, Janus will pay $50 million in restitution and disgorgement and $50 million in civil penalties, while also reducing fees by a total of $125 million over a five-year span. In addition, the firm has committed to paying $1.2 million to be used for consumer education.
Janus reached the preliminary deals with New York Attorney General Eliot Spitzer, Colorado Attorney General Ken Salazar, and the Colorado Division of Securities. The Denver fund shop and the Securities and Exchange Commission also reached an agreement in principle as to monetary terms of a settlement, but the resolution is subject to approval by the SEC Commissioners.
"I recognize that this comes at a cost to the company, but I do believe it gives us an opportunity to move forward," said newly appointed CEO Steve Scheid, during the company's first-quarter conference call, a day after the settlement was announced. "I am confident that this is the right deal for our shareholders. I recognize it's not cheap, but I believe the costs and the provisions are manageable."
The settlement may be just the first part of the beating the firm and others that have settled may face, as a swath of class-action lawsuits are looming on the horizon.
While Janus said it is still working out the details on how investors will be repaid, the fund shop said it does expect the "vast majority" of the money to directly benefit shareholders and that the $100 million in combined restitution and penalty will be available to compensate those impacted.
Scheid said the reduction in fees, $25 million a year for five years, will also result in a downward revision in EPS estimates of four to six cents a year. The $25 million annualized fee reduction will equate to approximately 1.7 basis points under management, Scheid noted.
"There is flexibility in how these fee reductions will be passed on and to which various funds and those details still need to be worked out," Scheid said. The firm said it expects to start implementing the fee reductions in select funds on July 1.
Russ Kinnel, director of mutual fund analysis at Morningstar of Chicago, said that while Janus' fees were not exorbitant, there is a logical rationale for the reduction.
"It does make sense as a way to pay the fine because it is by far the most effective way to get money back to shareholders," Kinnel said. "We've heard from all fund companies involved in the scandal that they are having a really difficult time trying to sort out how to actually send that fine money to shareholders."
Kinnel said one of the difficulties in distributing fine money back to harmed investors is actually determining which investors were harmed. He said that while there are some direct records for harmed investors, others are more difficult to determine because they may have been invested through an omnibus or 401(k) account. When forced to return money to shareholders, firms may encounter significant recordkeeping costs that could potentially cut into the money set to be returned, Kinnel said.
Noting that fee reductions are not "a perfect solution" because the harmed investors may not actually be the ones reaping the benefit of reduced fees if they are no longer invested with the firm, Kinnel said it is the most cost-efficient way to return funds.
However, Lipper Senior Analyst Don Cassidy said the continual fee reductions among guilty firms may have an adverse effect on clean shops. "If you lower the going price structure, those who didn't do anything wrong may find the need to reduce pricing to stay competitive, indirectly punishing the innocent along with the guilty," he said.
In addition to addressing fees and penalties, the settlement included corrective measures aimed at creating greater accountability at the firm's investment advisor and on the fund's boards. The boards of Janus funds will now be required to have an independent chairman with no previous connection to the Denver firm or its affiliates.
Additionally, the firm will refine its market-timing detection procedures, including provisions for greater transparency of omnibus accounts so the firm can further detect timers trying to slip in and out of the funds unnoticed through the cover of the large group accounts.
Janus has also agreed to hire a full-time senior officer to make sure the fees the funds charge are reasonable and are negotiated at "arm's length." Investors will also get new disclosure of the expenses and fees they are being charged.
During the call, Scheid turned his focus towards Janus' lagging performance. "I think it's clear that we're underperforming our potential and we're underperforming our peers," Scheid noted. "Our job is to correct that."
As for his own role, Scheid said he will not step down as chairman to make way for an independent chairman of the board. Scheid took over the Janus board chairmanship at the beginning of this year and was named CEO, replacing Mark Whiston earlier this month (see MME 4/26/04).
But, in looking to set the tone at the top, Scheid said he would reduce his CEO compensation by 33% and forfeit the compensation he is set to receive as chairman of the board of directors of Janus. He will also seek to change the composition of the CEO compensation from 70% cash to 30% long-term incentives, meaning stock options -- the majority tied to creating shareholder value.
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