Fremont Investment Advisors, Inc. has agreed to pay $4.1 million to settle an investigation into market timing and late trading of its mutual funds. The agreement with New York Attorney General Eliot Spitzer was reached in cooperation with the Securities and Exchange Commission.
Fremont has agreed to pay $2.146 million in restitution to injured investors and $2 million in civil penalties. Fremont, located in San Francisco, is a mutual fund advisor to 12 mutual funds with approximately $3 billion in assets under management as of March 31, 2004.
"The lesson from this long-running investigation is that you must not have one set of rules for privileged insiders and another set for everyday investors," said Attorney General Spitzer. "The mutual fund industry will only regain the public's trust when it treats everyone fairly and with respect."
Market timing activity within the Fremont Funds came to Spitzer's attention during his investigation of Canary Capital Partners in the summer of 2003. Since then, coordinated investigations by state and federal regulators revealed that from January 2001 to October 2002, Fremont permitted preferred investors to engage in improper, frequent short-term trading of shares of the Fremont Global Fund and U.S. Micro-Cap Fund at the expense of other fund shareholders, Spitzer said.
One of the agreements required a quid pro quo: in order to receive permission to time the U.S. Micro-Cap Fund, the timer had to make an investment of "sticky" assets in Fremont's New Era Value Fund, a relatively new fund co-managed by the then-president and chief executive officer of Fremont.
The agreements that Fremont made with timers were not disclosed to long-term investors. On the contrary, the prospectus for the Fremont Funds has stated since February 2000 that: "Fremont does not permit excessive short-term trading, market-timing, or other abusive trading practices in our Funds."
At the same time that certain investors were permitted to time Fremont funds, other investors who made six or more complete exchanges in a year were informed by letter that their trading privileges were being terminated and that "Excessive and unpredictable trading hinders a fund manager's ability to pursue the fund's long term goals."
In addition to the market timing permitted by Fremont, an employee of Fremont allowed a brokerage firm to engage in late trading, the illegal practice by which an order to buy or sell is placed after the New York Stock Exchange closes at 4:00 p.m. Eastern Time, but the trade is made at a price based on the fund's Net Asset Value prior to 4:00 p.m. Eastern Time.
Fremont has also agreed to significant corrective measures designed to create greater board and advisor accountability and to prevent the kinds of abuses that gave rise to this investigation.
