A written agreement that established specific guidelines on how a market timer could time investments in AIM Asset Management's funds is the subject of a lawsuit filed by the market timer against AIM's transfer agent.
St. George Money Management of Huntington, N.Y. is suing AIM Financial Services of Houston for breach of contract, claiming AFS violated the terms of a written contract when it cut St. George off from making exchanges on behalf of its clients. St. George is seeking $778,000 in damages, according to a complaint filed in U.S. District Court in New York. AFS denies any wrongdoing and has filed to have the case dismissed, according to Norman Trabulus, St. George's lawyer.
Lawyers and spokespersons for AFS declined comment on the matter.
While often vague, the guidelines market timers must adhere to when trading in and out of a fund are often established in a fund's prospectus, according to industry executives. Many funds limit the number of round trips investors can make as well as the amount of money that a market timer can move in and out of a fund.
But many funds do not define what is allowed and instead examine instances of market timing on a case-by-case basis. Fund companies may not issue specific rules on market timing because they do not want market timers pushing the limits of what is allowed, according to David Oliveri, a spokesperson for MFS Mutual Funds of Boston. MFS examines instances of market timing on a case-by-case basis for most of its funds, he said.
The written agreement between St. George and AFS attempted to establish specific rules for how St. George could move money in and out of several AIM funds. The complaint discloses that there were a number of disagreements about what actually had been agreed to, that led to AFS revoking the market timer's trading privileges.
St. George claims the written agreement AFS drew up is not reflective of what both parties initially agreed to verbally, the complaint states. Lonna Obelenus, a vice president with St. George, made revisions to the agreement to reflect the initial agreement she allegedly reached with AFS, and returned it to AFS signed, according to the complaint.
The agreement with Obelenus' revisions is the legal document which dictates the ground rules for St. George's trades because AFS executed an exchange with St. George after it had received the agreement, said Norman Trabulus, St. George's lawyer.
A copy of the written agreement AFS sent to St. George reveals fundamental differences with the verbal agreement. The written agreement allows St. George to engage in market timing on seven equity funds and one money market fund. It allows only five round-trip exchanges on all seven funds on an annual basis and permits exchanges only until 2:00 p.m EST. The written agreement defined a round trip exchange as "... an exchange out of an equity fund, and back again."
The verbal agreement allowed St. George five round-trip exchanges annually on eight equity funds and a money market fund, the complaint said. Under the agreement, Oblelenus' firm would be allowed to place orders until 4:00 p.m. EST, according to the complaint.
And a difference in the parties' definitions of a round trip resulted in AFS prematurely cutting off St. George's exchange privileges, the complaint said. According to St. George, "... a round trip' was defined to begin with an exchange into the money market fund," the complaint said.
Another point of contention between the two parties is the agreed upon deadline for exchanges. The written agreement states, "All timer exchange transactions must be faxed to the Market Timing Group and received by AIM Financial Services before 1:00 CST." But next to the stipulation, Obelenus wrote, "You said 4 p.m. EST was fine."
The relationship ended on Oct. 8, 1999 when a representative from AIM's compliance department informed Obelenus that St. George had used all of the round trips it was permitted under the written agreement, the complaint said.
St. George is suing for the profits and interest its clients lost as a result of its revoked trading privileges, contingent deferred sales charges AIM imposed on its clients when they redeemed their shares and lost advisory fees.
The case is unique because written agreements between market timers and fund companies are rare, said Carolyn Mertens, chairperson of the Society of Asset Allocators and Fund Timers of Denver.
"I haven't seen a written agreement, but it's a good idea," she said. "This is specifically what we'd like to see with more mutual funds and advisors in specifying what the parameters are. St. George did what it should have done. It bothers me that an agreement was signed and verbal promises were made and not adhered to by AIM."
While MFS does not establish specific rules on market timing in its funds, the firm unofficially allows market timing in five of its funds, Olivieri said.
"The decision was made that these five funds are large enough to absorb short term trades without making it difficult for the fund manager to manage the fund," he said.
Alliance Capital Management is another fund that examines instances of market timing on a case-by-case basis, said Shira Zackai, a spokesperson for the company.
"If it begins to disrupt the portfolio, then we refuse the orders," she said. "We have transfer agents monitor for timing and if (an order) is moving big money then we have the right to reject the orders to purchase shares for any reason, at any time."
Zackai would not comment on whether the firm has a written agreement with any market timing advisors.