The state of New York has reached an agreement with one of the nation's oldest mutual fund management companies to settle charges that the firm permitted illegal trading of its funds.

Under the settlement, Waddell & Reed, Inc., based in Kansas City, agreed to pay $50 million in restitution to investors and make fee reductions totaling $25 million over the next five years. The company also will adopt a series of management reforms.

"The evidence in this case showed that company officials didn't just look the other way at timing activities, they facilitated the transactions with full knowledge that small investors were being harmed, state Attorney General Eliot Spitzer said.

The investigation found that Waddell & Reed managers had entered into secret agreements with mutual fund timers. Under these agreements, the timers paid extra fees to Waddell & Reed in exchange for trading privileges that were denied to typical investors.

Specifically, in exchange for fees ranging from 1/4 percent to 1 percent of the timers' money, the company exempted the timers from trading limits and other anti-timing policies put in place to protect long-term investors.

Investigation also determined that Waddell & Reed's senior management knew that timing activity was harming the firm's small investors, and yet the company did nothing to stop the harmful activity for a period of 18 months. During that time, the Company's prospectus created the false impression that Waddell & Reed vigorously policed timing activity.

Under the agreement, Waddell & Reed will increase efforts to halt market timing, take steps to ensure that fees charged to investors are negotiated at arm's length, establish an independent board of directors, and improve disclosure of fees and expenses to investors.