The SEC has sanctioned a Phoenix firm that frustrated a handful of closed-end funds with its controversial tactics - known as mini-tender offers - to buy fund shares from individual investors.
IG Holdings allegedly violated federal securities laws because, when offering to buy stock and fund shares, it did not make sure that shareholders received all of the significant information they needed to evaluate IG Holdings' offers, the SEC said in an administrative complaint filed against IG on Aug. 19. IG Holdings was not fined but agreed not to violate federal securities laws again, a promise which requires that IG Holdings insure that investors receive all key information about its offers, according to the SEC.
IG Holdings neither admitted nor denied the SEC's allegations in settling the case. A lawyer for the firm did not return a call seeking comment. The SEC also issued a so-called "investor alert" educational booklet on mini-tenders available at the SEC's website.
The SEC's suit "serves as a warning to investors to monitor their investments carefully," said Richard Walker, director of the SEC's division of enforcement, in a statement. "Because the success of mini-tender offers depends on the offeror's ability to catch investors off guard, investors should take special care to scrutinize any offer for their securities."
In mini-tender offers, a firm offers to buy a small number of shares, normally less than five percent of the outstanding shares, of a closed-end fund or stock directly from shareholders rather than through a broker/dealer. The firm promises to pay a particular price up to a given date.
In more than 200 instances, IG Holdings made offers to buy back shares for less than shareholders could have received for their fund shares and stock by selling through broker/dealers, according to the SEC. The fact that the offers were being made at below-market value was not disclosed to all investors, the SEC alleged.
In late 1998 and early this year, some closed-end fund sponsors complained about mini-tender offers and mounted a counter-offensive, warning their shareholders that IG Holdings was making below-market offers for shares. (MFMN 2/15/99) In July, NASD Regulation warned members that mini-tender offers may be causing unsophisticated investors to lose money by selling their shares for less than market value.
It is unclear precisely how much IG Holdings raised from its mini-tender offers and how many closed-end funds were the targets of its mini-tender offers, said Steven Cutler, deputy director of the SEC's enforcement division. Although IG Holdings is free to continue making mini-tender offers, it must make sure that all future offers clearly disclose to investors that the tender offer price is less than the market, Cutler said.
Brian M. Smith, executive director of the Closed-End Fund Association of Kansas City, Mo., a trade group, welcomed the SEC's action. Although IG Holdings targeted several closed-end funds, it appears that, in most cases, it was unsuccessful in buying back closed-end fund shares, Smith said.