Nov. 9 (Bloomberg) -- Jean Bernhard Buttner never had much tolerance for people who broke her rules, says Jack Dempsey, who worked for her investment advisory firm Value Line Inc. until 2005.

Employees would face pay cuts if they arrived late or were caught eating at their desks, according to Dempsey, who complained in 2004 to the U.S. Securities and Exchange Commission about fees charged for mutual-fund transactions. Work before 7 a.m. and after 7 p.m. had to be authorized, said the Air Force Academy graduate, who lost an arbitration claim against Value Line after he left the firm.

“You were living in a constant state of fear,” Dempsey said in an interview, recalling how he was reprimanded once for eating a Subway sandwich at his desk. “It was like living in a totalitarian state.”

The Securities and Exchange Commission last week charged Buttner, 74, with breaking the rules herself by billing nine of her firm’s mutual funds for “phantom” brokerage services. Value Line agreed to pay $43 million in a settlement that bans Buttner and former Chief Compliance Officer David Henigson from the industry, ending a 21-year reign during which she guided the company from a household name to near obscurity.

The settlement cost, almost twice as much as the company earned in each of the past two years, and any additional lawsuits from mutual-fund investors could prompt Value Line to sell off the funds business, Geoff Bobroff, a fund consultant in East Greenwich, Rhode Island, said in an interview. The charges against the company may also put pressure on its research business as Value Line struggles to compete with faster-growing rivals such as Morningstar Inc., he said.

‘Death Knell’?

“On a variety of fronts, this could be a death knell for Value Line,” Bobroff said.

Buttner, a resident of Westport, Connecticut, and Henigson, who lives in Riverside, Connecticut, didn’t admit or deny the claims, nor did their New York-based firm, the agency said in a press release. Buttner owns all of the voting stock of Arnold Bernhard & Co., which has an 86.5 percent stake in Value Line.

“We remain a strong company and have the resources to cover these costs,” Buttner said in a Sept. 11 memo to employees obtained by Bloomberg News.

Richard Prins, an attorney for Buttner, declined to comment. William McBride, a spokesman for Value Line, did not respond to questions about the company’s practices.

Reputation

“Mr. Henigson is pleased to have this matter fully and finally behind him,” his attorney, Seth Taube at New York law firm Baker Botts LLP, said in an interview. He declined to provide any additional comment.

The settlement calls into question Value Line’s reputation as a “disseminator of objective financial information,” said Mercer Bullard, founder and chief executive officer of Fund Democracy LLC, an advocacy Group in Oxford, Mississippi. Value Line’s Web site describes the company as “synonymous with trust, reliability and objectivity.”

Buttner became Value Line president in 1985 and took over as chief executive officer in 1988 after the death of her father, Arnold Bernhard. Bernhard, who founded Value Line’s predecessor in 1931, built a reputation by providing independent stock evaluations and recommendations, which it sold by subscription to individuals and other investors.

Morningstar

At the time of Bernhard’s death, Value Line was facing competitors such as Morningstar, the Chicago-based rating company founded by Joseph Mansueto in 1984. While Mansueto expanded over the next decade, Buttner was locked in a legal battle over control of the firm with her twin brother Arnold Van Hoven Bernhard, whom she had ousted from the board.

The stock meanwhile languished. From the start of 1988, the year she became CEO, until the end of October this year, Value Line gained 18 percent, or 1.8 percent annually, compared with the 319 percent appreciation in the Standard & Poor’s 500 Index. Including reinvested dividends, Value Line returned 7.1 percent per year, compared with 9.2 percent for the S&P 500.

Value Line never responded effectively to competition from Morningstar or to the increasing demand by customers for electronic and then Web-based products, said Bobroff, the fund consultant. Morningstar, best known for its five-star mutual- fund ranking system, also tracks stocks, exchange-traded funds, college-savings plans, hedge funds and annuities.

‘No Visionary’

“My sense is that there really is no visionary there and maybe there hasn’t been since papa died,” Bobroff said, referring to Buttner’s father.

In its most recent quarterly report, Value Line said “total product line circulation continues to decline,” citing competition from low-cost research providers on the Internet. The company posted a net loss of $31.58 million in the three months ended July 31, compared with net income of $5.1 million in the prior year. Revenue from investment periodicals and related publications fell 9.8 percent to $9.3 million.

Value Line also has seven equity mutual funds and four fixed-income funds that together hold about $1.65 billion in assets. Total assets under management, including variable annuity products and cash funds, were about $2.5 billion as of Sept. 30, the company said.

The $91 million Value Line Fund declined at an average annual rate of 4.9 percent over the past five years, compared with the 0.3 percent return of the Standard & Poor’s 500 Index. The fund plunged 49 percent in 2008, landing in the bottom 2 percent of its category, Bloomberg data show. The $200 million Value Line Larger Companies Fund has advanced 0.7 percent over the past five years, doing better than 52 percent of its peers, Bloomberg data show. That fund dropped 39 percent in 2008.

SEC

Dempsey says he wrote in his 2004 complaint to the SEC that Value Line executed trades for 2 cents and charged the mutual funds 5 cents, while retaining the spread. Dempsey said he now works as a programmer in Easton, Connecticut, earning about half the salary he received at Value Line.

SEC spokesman John Nester declined to say whether Dempsey’s complaint triggered the agency’s probe.

Value Line reaped more than $24 million from 1986 to 2004 in brokerage fees on trades for Value Line mutual funds that were funneled through its affiliated broker, Value Line Securities Inc., the SEC said this week. The unit didn’t perform bona fide services on the trades, according to the SEC, which called the practice “fraudulent” in its press release following the settlement.

‘Valuable Resource’

Value Line’s model is still being used by individual investors and institutions such as Dennis Stearns’s Stearns Financial Services Group in Greensboro, North Carolina. The firm, which manages more than $300 million for clients, said Value Line’s ratings for individual stocks are particularly good at predicting three- to-five-year performance of companies.

“We’ve used them for over 25 years and they’re still a valuable resource,” said Stearns, a certified financial planner, adding he wouldn’t stop using Value Line research because of the SEC’s accusations.

Value Line has about 170 employees and estimates its more than a dozen print and electronic products are used by over half a million investors. The flagship Value Line Investment Survey covers some 1,700 stocks, according to company’s Web site.

Ex-employees include former Fidelity Investments fund manager Jeffrey Vinik, David Dreman, founder of Dreman Value Management LLC, and James Margard, chief investment officer at Rainier Investment Management, according to Business Week.

Dreman, Margard

“Value Line has restructured its investment management subsidiary and brokerage relationships and is confident that they conform to applicable regulatory requirements,” the company said in a statement Nov. 4. “Value Line management ended the mutual funds’ use of the affiliated brokerage in 2004.”

Value Line agreed to pay $24 million in disgorgement to defrauded fund investors, $9.5 million in interest and a $10 million penalty, the SEC said. Even with reimbursements, the SEC’s charges will discourage investors from putting money into Value Line’s mutual funds, said Fund Democracy’s Bullard.

“Value Line’s funds aren’t a compliance risk worth taking,” Bullard said.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net.

Last Updated: November 9, 2009 16:00 EST