The SEC has charged RS Investment Management (RSIM), CEO Randall Hecht and Steven Cohen, former chief financial officer, with allowing certain mutual fund investors to market time the firms funds. These investors profited from the trades, potentially at the expense of other shareholders, and RSIM was able to earn "substantial advisory fees."
All parties neither admit to nor deny the charges. RSIM is paying the SEC $25 million total, including disgorgement of $11.5 million and a civil penalty of $13.5 million. The company has also agreed to "undertake significant compliance measures designed to protect against future violations," according to the SEC.
Hecht and Cohen have also agreed to each paying a $150,000 penalty. Hecht has agreed to restrict his role at the firm, especially in the areas of compliance and disclosure. Cohen is suspended from association with an investment advisor or investment company for nine months and from serving as an officer or director of an investment advisor or investment company for the following two years. The charges and fines are considerable, especially given the relatively modest size of the firm, which manages $6.7 billion in assets under management in 10 funds.
"Today's action shows that the market timing abuses uncovered by regulators in recent months extend to relatively small boutique firms like RS," said Helane Morrison, district administrator for the SECs San Francisco District Office.
By prospectus, investors were limited to four transfers per year between funds, and RSIM did sometimes limit activity among investors who exceeded those limits. However, during the period between 2000 and the middle of 2003, RSIM entered undisclosed agreements that allowed certain Emerging Growth Fund investors to engage in unlimited trades with transactions ranging from $15 million to $65 million each. Sometimes the agreements stipulated that the investor park some funds in an RS fund for the long term.
In the fall of 2002, RSIM decided to generally limit timing in the fund, but it entered an agreement with one high-net-worth investor allowing trades up to $65 million as long as the investor maintained $130 million as a long-term investment in the Emerging Growth Fund. During the course of nine months, the investor made 80 exchanges and generated millions in trading profits.
Between fees from the excess trading and the long-term assets, RSIM generated at least $1.7 million in revenues.