A mutual fund group that wants to go out of business used overstated net asset values (NAV) for its funds.

Life Cycle funds of Wayne, Pa., overstated its NAV because the funds' adviser, Benson White & Co., Inc., withdrew the seed money it had put into the fund without reimbursing some of the start-up expenses it owed the funds, according to reports from the funds' accountants, PriceWaterhouseCoopers. Life Cycle filed the reports with the SEC Tuesday. The report said the NAV overstatements "likely" exceeded one penny per share but PriceWaterhouseCoopers did not estimate the precise amount.

Benson White redeemed its initial stake after Jan. 31, the accountants said. They did not identify the date of the redemption. Now the proceeds of the redemption -- roughly $89,000 -- are being held in escrow while the parties decide who should get the money.

Gene Gohlke, associate director of the SEC's inspection group declined to comment on Life Cycle specifically. But, he said the Investment Company Act and securities regulations require that NAVs be accurate within one penny per share. The NAV is key to funds because it represents the amount shareholders are paid when they redeem. If an NAV is overstated, shareholders who redeem receive a disproportionate benefit for their shares and those who remain receive less than they should.

"The accuracy of the NAV really is terribly important to shareholders, to us" and to the functioning of mutual funds, Gohlke said.

Life Cycle's board of directors want shareholders in the four-fund complex to vote to liquidate their holdings. On Tuesday, the funds sent shareholders financial reports and a proxy statement recommending the liquidation at a meeting scheduled for Oct. 20. The proxy statement has been pending with the SEC since June 9 while Life Cycle sought to obtain current financials for its funds.

A representative of PriceWaterhouse Coopers declined to comment on Life Cycle. The funds' attorney, Joseph V. Del Raso of Philadelphia-based Pepper, Hamilton & Scheetz and Clay Mansfield, one of the principals in Benson White, did not return calls seeking comment by press time. An official for BISYS Fund Services, Inc., the fund's administrator, referred questions regarding the fund's dealings to Del Raso and declined further comment.

Life Cycle has found itself in the unusual situation of having a fund advisor that cannot pay what it owes the fund. (MFMN 8/3) Benson White had promised to reimburse fund expenses to hold down costs but stopped doing so. An SEC audit report in Jan., 1998 raised "significant issues" regarding the unreimbursed expenses, according to the proxy statement filed last week.

The auditors said that if Benson White redeemed its initial stake, it was required to pay for some of the start-up costs of the funds. The firm has not paid those costs despite the redemption, the auditors said.

In addition, it is possible that the funds' NAV was overstated even before Benson White sold its start-up stake because of overdue, unpaid expenses which Benson White owed the funds. The funds have written off at least $393,000 which Benson White owed the funds but did not pay, according to the funds' fiscal 1997 audit filed last week. For the year ending July 31, 1997, Benson White paid only $62,500 of the approximately $456,000 it owed the funds, the auditors reported.

The auditors said that while the fund and its directors believe the funds' NAV as of July 31, 1997 was accurate because of the write off, there is "significant uncertainty" over whether the funds should have written off Benson White debts sooner. In the proxy statement, the fund said it would attempt to collect any outstanding expenses due shareholders.

Ultimately setting fund NAVs is the responsibility of a funds' directors. Last month, an SEC administrative law judge issued a cease and desist order against the independent directors of the Parnassus fund in a case in which the SEC alleged that the fund's NAV was not accurate. The directors disputed the allegations and the SEC judge did not fine the directors.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.