Morningstar revealed Friday that it has received a Wells Notice from the SEC for posting inflated performance figures for a mutual fund for a period of nine business days in March. Although the SEC does not have oversight over financial data publishers, it is considering bringing a civil suit for what it believes was reckless handling of data, Morningstar Chairman Joseph Mansueto told The Wall Street Journal.
But an employee of the transfer agent saw figures on another Web site that showed the funds performance dropping significantly in December 2003 due to a large capital gain distribution. Wanting to correct what he thought was probably also wrong on the Morningstar Web site, in late February, the employee sent one of Morningstars analysts inflated data, which the Morningstar analyst inputted. These incorrect figures erroneously boosted the fund to become the top-performer in its small-blend category.
Then, on March 12, the transfer agent contacted another Morningstar analyst via e-mail saying that its figures were too high. But because the transfer agent included the same figures from the previous correspondence, the analyst saw no reason to make any changes.
The SEC contacted the fund research and data firm on March 23, informing it that it had the wrong information, at which point Morningstar made the necessary changes for the Rock Canyon Top Flight fund. The SEC followed up with a Wells Notice on May 24.
"We believe the heart of the SEC concern relates to our timeliness in correcting the data during the nine business days from March 12 to March 23," Mansueto said. "In this case, we believe our collection process worked; we had properly calculated the funds returns. Unfortunately, in an effort to be responsive to the transfer agents instructions, we overrode our correct returns."