Three former Invesco executives agreed to pay a combined $340,000 in fines to settle enforcement actions for their role in a market-timing scheme that allowed preferred clients to make excessive trades in exchange for sticky assets.
In a Securities and Exchange Commission ruling handed down last Tuesday, Timothy Miller, former chief investment officer and a portfolio manager for Invesco Funds Group, Thomas Kolbe, the former national sales manager for IFG, and Michael Legoski, a former assistant vice president in the firm's sales department, were ordered to pay penalties of $150,000, $150,000 and $40,000, respectively, and $1 apiece in disgorgement.
Additionally, the trio was effectively banned from the industry for a period of one year. Miller and Kolbe were further prohibited from serving as an officer or director of an investment company for three years and two years, respectively. Meanwhile, Legoski is prohibited from associating with any broker/dealer for one year. The three consented to the deal without admitting or denying any wrongdoing.
The news is the latest in a string of revelations in the last nine months that have sullied the reputation of the Denver-based fund shop and sent its shareholders packing. The Invesco brand has languished from poor investment performance and a sweeping regulatory probe of mutual fund trading practices. On top of that, many of its funds have been renamed or merged under its sister company AIM Investments of Houston, and a number of executives have left the company. The Denver headquarters now has fewer than 50 employees remaining on the retail money management side.
The settlement follows a series of delays in the negotiation process brought on by the discovery of new evidence that there were additional people responsible for the trading transgressions. Last December, the SEC and New York Attorney General Eliot Spitzer filed an administrative complaint against Invesco and former IFG CEO and COO Ray Cunningham for knowingly permitting favored investors to trade in and out of Invesco funds at the expense of its long-term shareholders.
Miller, Kolbe and Legoski, while not named in the original complaint, were threatened with being added to the list of defendants after the U.S. District Court of Denver granted the SEC more time to evaluate the case. Had the SEC filed an additional complaint, odds are those three men would have been named.
According to the complaint, from 2001 through July 2003, IFG allowed select investors to make exchanges and redemptions totaling about $58 billion in certain Invesco funds despite explicit guidelines in its prospectuses limiting the number of exchanges. Indeed, one prospectus disclosed that shareholders could "make up to four exchanges out of each fund per 12-month period."
In some instances, IFG asked timers to invest sticky money in other Invesco funds. The illicit trades were not disclosed to investors or the board of trustees. Miller, in his role as CIO, approved at least 30 such market-timing arrangements, the SEC said.
Miller's attorney, James Doty, said in a statement that his client took steps to curtail the practice. "On numerous occasions, he took decisive action to rein in market-timing activity at Invesco when he believed that activity might threaten investors' interests," Doty said. "If he let down the funds' investors, he deeply regrets that."
Legoski, for his part, was the head of Invesco's "market-timing" desk and was responsible for policing funds for suspicious trading activity. Essentially, he was the front man tasked with negotiating market-timing agreements either over the phone or through e-mail. Legoski communicated to market timers that they must funnel money to other Invesco funds in order to maintain their ability to time funds.
Kolbe, as national sales manager and Legoski's supervisor, was tasked with overseeing the market-timing desk and ultimately boosting assets under management. His other dubious distinction, according to the SEC, was that he introduced known market timer Canary Capital Partners to Invesco's European offshore complex, a deal that enabled IFG to garner additional fees. Kolbe's and Legoski's lawyers could not be reached for comment.
"Those investment advisors and their employees who permit these market-timing agreements at the expense of the funds will be punished," said Randall Fons, regional director of the SEC's Central regional office, in a prepared statement.
The case against Invesco signals a new chapter in the mutual fund scandal because it marks the first time a portfolio manager was involved in the settlement of an enforcement action, not to mention two more lower-level employees than in previous cases.
The reason behind the paltry disgorgement number outlined in the settlement has to do with a requirement under the Sarbanes-Oxley Act, which mandates that money paid as a penalty cannot be paid into a "fair fund" for eventual distribution to investors unless it is accompanied by some sort of disgorgement. In this case, a clear-cut disgorgement number could not be determined, forcing the Commission to assign a nominal amount to free up the penalty money for deposit into a fair fund.
Invesco, a unit of the UK's Amvescap PLC, and Cunningham had not reached an agreement with regulators at press time, but are said to be "at the tail end of settlement discussions," according to Cunningham's attorney, Richard Caschette.
"The Commission will continue its investigation into market-timing practices and aggressively seek sanctions against those who participated in any wrongdoing," Fons said
When MME asked the SEC to explain why it went after the lower-level staffers in this case, Amy Norwood, assistant regional director of the SEC's Central regional office, replied: "It depends on what the facts are. If we think there is sufficient evidence to support charges, we'll bring them--presumably against the janitor, even."