Beacon Rock Settles Timing Case for $475K

Hedge fund Beacon Rock Capital has agreed to pay $475,000 to settle charges that it market timed mutual funds between 1999 and 2003. It is the first criminal case against a hedge fund for market timing.

According to the U.S. attorney's office, Beacon Rock and Thomas Gerbasio, an executive at a Philadelphia broker/dealer, set up more than 30 accounts to engage in market timing, earning a profit of $2.4 million for Beacon Rock and $215,000 for Gerbasio.

Hedge Fund Sues Mass. for Web Posting Restrictions

Philip Goldstein, one of the principals of hedge fund Bulldog Investors, succeeded last year in overturning the hedge fund registration rule. He also is challenging a Securities and Exchange Commission rule that would require hedge funds to disclose their holdings every quarter, citing theft of intellectual property.

Now Goldstein is taking on Massachusetts securities regulators, The Wall Street Journal reports.

Goldstein has sued the state, charging it with infringing on his First Amendment free speech rights. The suit seeks an injunction against Massachusetts.

In January, the state said Goldstein improperly solicited inquiries about his hedge fund on his website; unregistered hedge funds are not allowed to solicit customers by offering their investment opportunities to the public.

Goldstein called the advertising restrictions "silly" since regulations allow only accredited investors to place their money in hedge funds.

Veras to Return $38M To 810 Mutual Funds

The Securities and Exchange Commission has gotten the Veras hedge funds to agree to return $38 million to 810 mutual funds that they market timed.

Under the Sarbanes-Oxley Act, the SEC can include civil penalties along with disgorgement in fair fund distributions.

To date, the SEC has distributed more than $1 billion in fair funds.

"Today's distribution marks another significant step in the Commission's vigorous program to return money to investors injured by mutual fund trading abuses," said Linda Chatman Thomsen, director of the division of enforcement.

The SEC first brought its charges against the funds and two of their principals in December 2005. They were: Veras Capital Master Fund, VEY Partners Master Fund, Veras Investment Partners, Kevin D. Larson and James R. McBride.

Although the respondents settled the order without admitting to or denying the wrongdoings, the SEC said that between January 2002 and September 2003, the hedge funds market timed and late traded the mutual funds.

Fidelity Nearing Settlement With SEC Over Gift Probe

The Securities and Exchange Commission has begun talks with Fidelity Investments into the inquiry whether the acceptance of lavish gifts by traders harmed shareholders, according to The New York Times.

In December, Fidelity paid $42 million to its mutual funds following an internal investigation into the matter by the funds' trustees. The probe found that Fidelity failed to oversee traders who accepted expensive travel and entertainment gifts from brokers seeking to handle stock trades on Fidelity's behalf. However, the firm said it could not determine whether acceptance of the gifts affected fund costs or performance. Thus, Fidelity said, it cannot be demonstrated that any Fidelity fund or shareholder suffered financial harm as a result of accepting the gifts. The company has taken the same stance in the settlement talks, attorneys said.

The SEC has indicated it is still focused on the question of harm, financial or otherwise. Attorneys, speaking on condition of anonymity because the investigation is ongoing, said a key issue in the settlement talks is whether the SEC will succeed in its debate that the gift giving harmed shareholders.

Anne Crowley, a Fidelity spokeswoman, said the company would not comment on its discussions with regulators.

Australia's Fund Assets Have Doubled Since 2003

With assets more than doubling in mutual funds in Australia since 2003, asset management firms around the world are looking to enter or expand in the market, Bloomberg reports.

Previously, investment managers overlooked the country, with a population of a mere 20 million people. But since Australia began requiring employers to save 3% of workers' salaries in 1992 and 9% beginning in 2002, workers in the country now have an average of $38,802 invested in mutual funds. Assets now hover at $763 billion, up from $356 billion in 2003, according to the Investment Company Institute.

And they are expected to rise considerably this year due to the elimination of a 15% tax on lump-sum payouts for people age 60 or over.

"All that money simply cannot be invested in Australia," said Alan McFarlane, managing director of Walter Scott & Partners in Scotland, which manages $3 billion of Australian's money. "That makes Australia one of the most attractive markets on this planet for global equity mandates."

Legg Mason Opening Offices Throughout Asia

With an eye to gaining a foothold in China, Legg Mason is opening offices in Hong Kong, Taiwan and Singapore, Reuters reports.

"China is an extraordinary and growing asset management market, and at present, we're currently evaluating our strategy as it relates to China, and we'll continue to do so over time," said Terence Johnson, Legg Mason's managing director of international distribution.

Meanwhile, the firm is optimistic about U.S. markets for the foreseeable future. Mary Chris Gay, portfolio manager of the Legg Mason Value Fund and an assistant to famed portfolio manager Bill Miller, said: "Part of the reason we're so optimistic about returns that we're likely to see this calendar year and over the next couple of years is because of the underperformance the U.S. market has had over the past five to six years relative to other markets around the world, as well as the significant undervaluation we believe is apparent in the market."

Gay added: "We don't believe we're likely to see the stellar returns of the late 90s, but we do believe relative to European markets, we'll see fairly good outcomes for the U.S. market."

Morningstar Applauds Turnaround at Janus

While the bear market and the fund scandal have taken a tremendous toll on Janus since 2000, Morningstar said the firm has, once again, returned to its roots as a solid investor and stock researcher.

Janus's troubles began in the late 1990s when its growth investing style was delivering impressive returns, and, with it, strong asset flows. As a result, the funds ended up with overlap, and the firm hired a slew of analysts who were too inexperienced to recognize the impending burst of the bubble.

Then, when the bear market inevitably did hit, the performance of nearly all of Janus's growth-oriented funds was abysmal. Star managers left the firm in droves. On top of that, the scandal hit.

"Our concerns were so pressing," Morningstar attests, "that we recommended that investors sell Janus funds in 2003."

Particularly egregious was the fact that many investors placed money in Janus funds at the tail end of the bull market and left as the market crashed and Janus scandal headlines began appearing. Morningstar Investor Returns show that in the 10 years ended February 2006, Janus funds in aggregate returned 9% but the average investor made only 3.9%.

Today, however, Morningstar credits Janus CEO Gary Black with instituting a compensation plan that puts portfolio managers' focus on long-term results, recruiting more experienced analysts and researchers, expanding the universe of stocks that the firm tracks, attempting to reduce risk by offering a more diversified array of funds and selling more carefully and methodically through advisers rather than directly to investors.

Healthcare Costs Estimated At $215K in Retirement

A 65-year-old couple retiring in 2007 will need $215,000 to cover medical costs, according to Fidelity Investments. This is a 7.5% increase from expenses in 2006. Since Fidelity began estimating these costs in 2002, they have risen an average of 6.1% a year. The figure doesn't include over-the-counter medications, dental work or long-term care.

"A significant amount of retirees told us their state of health is not good, they are spending more in retirement than they ever planned, and some were even forced into an early retirement due to health problems," said Brad Kimler, senior vice president at Fidelity Employer Services Co. "But if today's workers act now to take advantage of the many retirement savings vehicles available to them, they can create a more secure and enjoyable retirement."

Janus Paid CEO Black $10.6 Million in 2006

Janus paid its chief executive officer, Gary Black, $10.6 million in 2006, a filing with the Securities and Exchange Commission shows. His base salary was $800,000 and the rest of his compensation was performance-based.

The package included $7.8 million for reaching performance goals, $824,694 vested from an award given to Black when he joined the firm in 2004 and $1.2 million in stock and options.

Janus' net income rose 52% in 2006 to $133.6 million, up from $87.8 million in 2005.

Bear Stearns Files to Offer Active Income ETF

Bear Stearns has filed with the Securities and Exchange Commission to offer an actively managed exchange-traded fund that would invest in money market funds and short-term fixed-income obligations, The Wall Street Journal reports. The latter would include U.S. government securities, U.S. and foreign bank obligations, corporate debt obligations and other income instruments.

The fund's goal would be to exceed the going money market fund rate.

"Unlike an index fund, which seeks to achieve, as closely as practicable, the total return of the securities comprising a specified market index," the filing states, "the fund will be actively managed by its portfolio manager."

The SEC has yet to approve any proposal thus far for an actively managed ETF, as one of the main problems is disclosing holdings in an ETF since active managers don't want others to trade on their holdings ahead of them. But disclosing short-term fixed-income holdings isn't so much of a problem since they are more tied to the Treasury market than to individual securities, said Joe Keenan, managing director at Bank of New York, which would act as the fund's administrator.

Yet, Keenan also sees the formula as one that would work for other asset classes. "If Bear Stearns is effective at managing the fund, I think you have to assume they would take the structure into other asset classes," he said.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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