District Court Orders Market Timer to Pay $500k

The U.S. District Court for the Northern District of Illinois has ordered John M. Fife, a principal of Clarion Management, a hedge fund based in Chicago, to pay more than $500,000 in fees and disgorgement for having allegedly placed illegal market-timing trades in 2002 and 2003. The court also barred him from working at an investment advisory firm for 18 months.

The judgment follows the Securities and Exchange Commission's initial suit against Fife and Clarion in January.

The SEC said he created Clarion with the sole purpose of market timing international mutual fund sub-accounts in variable annuities. The SEC said he purchased variable annuity contracts issued by Lincoln National Life Insurance and used deceptive tactics to hide Clarion's ownership of the annuities by creating phony family trusts and limited liability companies as beneficiaries. When Lincoln imposed trading restrictions in 2002 when it discovered that it was actually Clarion that was the beneficiary of the contracts, Fife then surrendered the contracts and purchased additional ones under new trust and limited liability company names.

Fidelity to Open R&D Unit In Galway, Employing 49

Fidelity Investments will open a research and development facility in Galway, Ireland manned by 49 professionals who will collaborate with a dozen professors at local universities, the Boston Globe reports. They will join the 300 people who already work in Galway and Dublin in fund administration.

"The quality of the Irish work force, the success of our existing Irish operations and the world-class research carried out in the Irish universities were key factors in our decision to expand in Ireland," said Paul Murtagh, managing director of the Fidelity technology group in Ireland.

Ireland has been pushing to attract research and development business in recent years because of its high pay. In fact, Ireland's Investment and Development Agency said it offered financial incentives to Fidelity, although it declined to specify what they were.

ICI Spent $2.3 Million On Lobbying Through June

The Investment Company Institute spent $2.3 million lobbying Congress, the Treasury, the Labor Department and the Securities and Exchange Commission in the first half of the year, the Associated Press reports, citing a disclosure form with the Senate.

Issues of concern to the ICI included shareholder votes on executive pay, regulation of the securities markets, international investments, 401(k) fees and taxes.

Darfur Activists Extend Plea to Four More Firms

The Save Darfur Coalition is extending its campaign against mutual fund firms that have investments in companies in Sudan to include four more fund firms: American Funds, Franklin Resources, JPMorgan Chase and Vanguard, the Boston Globe reports.

In addition, the group plans to continue to pressure Fidelity via television and print ads and a petition with 150,000 signatures to sell its remaining shares in PetroChina, a Beijing oil company that does business there. As of Aug. 1, Fidelity still owned $608 million in PetroChina stock. Franklin owned $1.7 billion and JPMorgan Chase $1.6 billion.

"We're still targeting them because they haven't fully divested," said Zahara Heckscher, campaign manager for the Save Darfur Coalition. "We're asking them to do the same thing we're asking the others."

Franklin defended its investments in the region, saying in a statement, "In our experience investing in emerging markets, we have seen that fostering economic and business development through investment in troubled regions can often help in achieving reform."

American Funds' parent Capital Group Cos. issued a similar statement, saying that it understands the group's concerns, but "others believe that the rest of the world must stay engaged to have any influence" over the actions of the Sudanese government in the Darfur region, where mass genocide is said to be taking place.

A JPMorgan spokeswoman said she could not immediately comment since the funds holding PetroChina are based in London and Hong Kong, and a Vanguard spokeswoman said two of the three funds with holdings in PetroChina are index funds tied to a benchmark. A Fidelity spokeswoman said many of the company's funds with PetroChina holdings are run by a sister company, Fidelity International, based in London. The Globe attempted to reach a spokesman there with no success. The Fidelity spokeswoman in the U.S. also noted that only two of the funds holding PetroChina are based in the States with total holdings of only $65 million.

Hedge Fund Honchos Make More in 10 Minutes Than Average Worker in a Year

The top 20 hedge fund executives' earnings averaged $655.5 million in 2006, according to a report by the Institute for Policy Studies and United for a Fair Economy.

By comparison, the average U.S. worker earned $29,500 last year, which means that at an average hourly salary of $210,700 for the top hedge fund honchos, they earned more in 10 minutes than most Americans do in a year.

And these lucrative earnings are expected to inflate pay packages at publicly traded companies, said Sarah Anderson, co-author of the report and director of the global economy program at the Institute for Policy Studies.

"There are people out there with a straight face claiming that public company executives are underpaid," Anderson said. "The CEO-worker pay gap is finally getting some high-profile attention from presidential candidates, but lawmakers still aren't doing nearly enough to tackle the gap."

Further, The 20 highest-paid figures in the private equity and hedge fund industry collected 3,315 times more in average annual compensation in 2006 than the top 20 officials of the federal government's executive branch, including the President of the United States.

"Today's soaring pay gap between business executives and elected leaders in government essentially makes corruption inevitable," noted Sam Pizzigati, an Institute for Policy Studies associate fellow. "With such huge windfalls at stake, business leaders have a powerful incentive to manipulate the political decisions that affect corporate earnings."

Market Historians Fear Broader Subprime Effects

The big debate on Wall Street these days is whether the subprime credit crisis is a short-term financial problem or an indication of a protracted economic downturn, The Wall Street Journal reports. Market historians fear it's actually the signal of the latter.

The defaulting loans have certainly fueled some panic, much like the market crash of 1987 and the failure of Long-Term Capital Management in 1998. But in those cases, the market rebounded within six months.

The problems of the subprime crisis, however, stretch far beyond the mortgage loans themselves to a number of fundamentals, including continuing declines in real estate prices, construction, home sales, housing-related consumer spending, other loans and mergers and acquisitions.

Thus, some market historians point to the savings and loan and the junk bond crises in the late 1980s, and some market participants are saying that while the market has declined 10%, it probably hasn't fully priced in continuing bad news.

Macroeconomic Metric Foretold Subprime Crisis

Back during the Asian credit crisis in the 1990s, MIT-trained economist and hedge fund manager Nandu Narayanan took a close look at the ratio of a country's credit to its gross domestic product, BusinessWeek Online reports. In Malaysia, for instance, it was 220%, meaning $2.20 worth of debt for every dollar of economic output.

Looking at the U.S. market late last year, Narayanan, manager of the $100 million Trident Investment Management fund, found that the ratio was between 370% and 440%, which he called "well north of anything ever seen in most countries of the world."

Sensing that any increase in interest rates in the U.S. could create severe problems in the credit market, Narayanan foresaw that subprime mortgages would crash and default, so he began shorting insurance policies on debt issued by subprime lenders and mortgage insurers, boosting his fund's return to 35% so far this year.

Sensing that the market has much lower to go, Narayanan believes his fund can deliver even higher returns for 2007. "If everything that we shorted goes to zero, we have the opportunity for a 200% return," he said. "While that is unlikely to happen, we are hoping to end up with returns in the 60% to 80% range."

Likewise, John Paulson, a veteran of Bear Stearns who now runs an eponymous hedge fund of his own that is up a stunning 300% this year, began tracing the declining subprime mortgage index last winter and decided to short that market.

Investors Yank $32 Billion From Hedge Funds in July

Investors pulled $32 billion from hedge funds in July, the largest monthly withdrawal since 2000, and experts believe withdrawals could even be higher in August, the Associated Press reports.

Nonetheless, according to a report from TrimTabs, as long as another financial crisis on the order of the subprime loan defaults does not happen, withdrawals should lessen in coming months.

In total, TrimTabs estimates that hedge funds have $1.9 trillion in assets. The subset of hedge funds that saw the biggest outflows, according to the company, were hedge funds-of-funds, which lost $55 billion, or 5%, of their total $1.2 trillion in assets. By comparison, such funds reaped $162 billion year-to-date through June.

Countering those outflows, regular hedge funds took in $23 billion in flows in July.

"We believe de-leveraging and risk reduction by funds of hedge funds was a major cause of the turbulence in the credit markets and the equity markets in July and August," said Charles Biderman, TrimTabs CEO.

In fact, Biderman said, redemptions of hedge funds-of-funds were probably responsible for wiping out $2 trillion in U.S. stock market valuations and another $2 trillion overseas.

"In our opinion," according to the TrimTabs report, "funds of hedge funds-even those that do not use leverage-make financial markets more volatile than they would be otherwise. To justify their fees, funds-of-funds tend to trade their assets frequently. In addition, many funds-of-funds leverage their assets using bank debt. Add leverage to an industry in which countless imitators copy yesterday's unique investment style, and the law of unintended consequences rears its ugly head."

U.S. Equity Funds Lose $13B in Flows Since June

The market volatility has sent investors to the exits in droves, Dow Jones reports. In July, investors pulled $4.1 billion from U.S. equity mutual funds, and in August, early projections put net outflows at $9 billion.

"It has been a very volatile market," said Charles Biderman, CEO of TrimTabs, which announced the August figure.

Although the average U.S. stock fund fell 3% in July, the market rose slightly in August, beginning its upturn since the middle of the month, due to the Federal Reserve's discount rate cut on Aug. 16, Biderman said.

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

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