Invesco charged in market-timing case

By Lisa Singhania
Associated Press

NEW YORK — Regulators charged Invesco Funds Group Inc. and its chief executive with civil fraud yesterday, saying the company set up an intricate system to recruit big-money market timers despite complaints from its own employees that shareholders were being harmed.

Also yesterday, Strong Financial Corp. founder Richard S. Strong announced he was stepping down from the company and its mutual funds, after months of pressure about questionable trading that some regulators indicated could lead to charges.

In separate filings, New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission accused Denver-based Invesco and CEO Raymond Cunningham of defrauding shareholders by allowing certain clients to engage in market timing — frequent, short-term trading that skimmed profits from long-term shareholders — despite policies against the practice.

Regulators are seeking the return of nearly $161 million in fees they say Invesco collected from investors in the funds involved, as well as unspecified civil penalties.

"IFG and its CEO willingly sacrificed the interests of mutual fund shareholders when market timers dangled the prospect of higher management fees in front of them," said Stephen M. Cutler, director of the SEC's enforcement division.

"By granting special trading privileges to selected customers, they readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds' prospectus disclosures on market timing."

Invesco Funds denied wrongdoing and said it would "vigorously" contest the charges. A call to Cunningham's lawyer was not immediately returned.

Strong's resignation, which included a statement saying he would divest control of his company, followed disclosures in October that he had made short-term trades in Strong funds for his own benefit and that of friends and family members. He has not been charged with wrongdoing, but regulators including Spitzer have indicated charges are possible.

Strong stepped down as chairman, chief executive and chief investment officer of Strong Financial Corp. and from the boards of the company and its funds. He previously had resigned as chairman of the board, but remained a director, saying he did not believe the trades hurt shareholders.

A spokesman for Spitzer's office had no comment on Strong's resignation other than to say it would not affect the investigation.

Kenneth J. Wessels, former president of the Dain Rauscher Wessels Capital Markets division and director of Dain Rauscher Corp., will replace Strong as chairman and CEO. Richard T. Weiss, Strong's portfolio manager, will lead the investment department.

The investigation by federal and state authorities into market timing and other improper fund trading already has ensnared Putnam Investments and the founders of the Pilgrim Baxter mutual fund family. Dozens of other companies have been subpoenaed.

Market timing is not illegal, but is strictly limited by most fund companies because it can skim profits from longer-term shareholders and increase transaction fees. Authorities contend that funds that made selective exceptions committed fraud.

The prospectuses for Invesco funds restricted fund trades to four a year, but authorities allege big clients were exempted as part of a "Special Situations" program that became a growing part of Invesco's strategy in 2001 as the market was falling.

Participating customers were allowed to market-time certain funds as long as they invested at least $25 million with Invesco and agreed to keep money in Invesco bond or money market funds. That helped Invesco increase its overall assets and the fees it received.

The program even had its own application form, according to the filings, which also state that by mid-2002, Invesco had approximately $900 million in timing assets, accounting for roughly 5 percent of its $18 billion in assets.

One of the "Special Situation" clients was Canary Capital LLC, the hedge fund operator that earlier this year agreed to pay $40 million to settle New York state charges that it had engaged in improper trading.