Mutual funds’ ties to so-called expert networks that have been probed as part of an insider trading investigation may undermine efforts by the industry to stem three years of client withdrawals from stock funds.
Janus Capital Group Inc. and Wellington Management Co. were among firms that received requests for information last week as part of an insider trading investigation involving hedge funds as well as mutual funds. None of the companies have been accused of wrongdoing.
The probe hits firms as they try to reverse $90 billion in withdrawals from U.S. stock funds since the beginning of 2009. Damage from the industry’s last run-in with regulators, a series of trading scandals in 2003 and 2004, took years to repair and led to more than $3 billion in fines against more than two dozen firms, including Bank of America Corp., Putnam Investments, Janus and MFS.
“There was reputational damage from that scandal that took a long time to heal,” said Burton Greenwald, a fund-company consultant based in Philadelphia. “In an industry that handles people’s money and savings, reputation is enormously important.”
Both MFS and Wellington were clients of Broadband Research LLC, a Portland, Oregon-based company that provides research to money managers and whose founder, John Kinnucan, was visited by federal officials as part of the probe. Affiliated Managers Group Inc.’s Friess Associates, and the Columbia Management unit now owned by Ameriprise Inc., have also been clients of the researcher, Kinnucan said in an interview. None of them have been accused of wrongdoing.
The crackdown on insider trading led by U.S. Attorney Preet Bharara in Manhattan started in October 2009 with charges filed against Raj Rajaratnam’s Galleon Group LLC. After Rajaratnam was arrested, his $3.7 billion firm received $1.3 billion in redemptions in a matter of days, and within a week, he had decided to liquidate the funds. Rajaratnam, who is awaiting trial, has denied any wrongdoing.
This month, industry experts took the spotlight when prosecutors charged a French doctor with tipping off a portfolio manager at FrontPoint Partners LLC on the results of trials for the hepatitis-C drug Albuferon. FrontPoint got withdrawal requests from investors of about $3 billion for the end of the year following the disclosure, and liquidated its $1.5 billion health-care funds.
Don Ching Trang Chu, an employee of an expert network called Primary Global Research LLC in Mountain View, California, was arrested on Nov. 24 for allegedly providing insider information to hedge funds. Chu had a roster of Asia-based employees of North American technology companies to feed information to clients, according to court documents. James DeVita, an attorney for Chu, declined to comment.
Kinnucan, who provides research about technology companies to hedge funds and mutual funds looking for an edge in the stock market, said he was visited by agents from the Federal Bureau of Investigation on Oct. 25, who questioned him about his research. He said agents threatened to arrest him and asked him to wear a wire to record a conversation with a money manager, whom he declined to name.
All of his clients have left him since he told them about the FBI’s visit in an e-mail, he said.
Mutual funds were unscathed by the probes until last week, when Janus and Wellington were among a number of asset managers to receive information requests. Hedge funds Level Global Investors LP, Diamondback Capital Management LLC and Loch Capital Management had their offices raided by U.S. officials. Balyasny Asset Management LP, the Chicago-based hedge fund, said in a Nov. 24 letter to investors that they received a faxed subpoena from the government “requesting a broad set of general information for the last few years.” None of the firms have been accused of wrongdoing.
The mutual-fund companies that were contacted by federal prosecutors declined to comment when called by Bloomberg News on whether they use expert networks and what information they were asked to provide.
Janus, based in Denver, said on Nov. 23 that it received a request for “general information and intends to cooperate fully with that inquiry.” The firm, in a U.S. Securities and Exchange Commission filing, said it would not provide further updates unless required by law. Janus manages $160.8 billion in assets.
Wellington’s offices in Boston were not visited by agents from the Federal Bureau of Investigation, a person familiar with the matter said. On an internal call on Nov. 22, Wellington said that it’s conducting a review of records, and that it didn’t engage in illegal trading, according to another person, who asked not to be named because the firm is private.
“The document request is general and broad in scope,” Wellington told clients in a Nov. 23 letter to clients. Wellington didn’t provide details on what documents were asked for or which government agency asked for them.
Wellington, which manages about $598 billion in mutual funds and in accounts for institutional investors, runs about $175 billion in 19 funds for Vanguard Group Inc. Valley Forge, Pennsylvania-based Vanguard, the largest U.S. manager of stock and bond funds, remains “fully confident in and committed” to the relationship with Wellington, according to an e-mailed statement.
A spokeswoman for Wellington declined to comment.
John Reilly, a spokesman for Boston-based MFS, said in an interview on Friday that company had not received any requests for information from investigators. MFS, which managed $190 billion as of Aug. 31, is a unit of Toronto-based Sun Life Financial Inc. and created the first U.S. mutual fund in the 1920s.
Friess Associates, based in Delaware, manages the Brandywine funds, including the $2.2 billion Brandywine Blue Fund. Affiliated Managers, the Beverly, Massachusetts-based company that owns stakes in two dozen money managers, owns 70 percent of Friess Associates. Laura O’Brien, a spokeswoman for Affiliated Managers, declined to comment.
Ben Pratt, a spokesman for Minneapolis-based Ameriprise, didn’t return a call seeking comment. Ameriprise in April completed its $1 billion acquisition of Columbia’s stock and bond funds from Bank of America, to create a fund manager with more than $500 billion in assets.
The mutual-fund companies at the center of the trading abuses seven years ago were accused of allowing certain investors, including hedge funds, to make rapid and after-hours trades at the expense of ordinary shareholders. The charges were brought by the U.S. Securities and Exchange Commission, then New York Attorney General Eliot Spitzer and state regulators.
Boston-based Putnam struggled with investor redemptions that continued for the next five years, before the financial crisis brought about another round of withdrawals. Assets at Putnam are at about $118 billion, down from $272 billion before the probes were announced in 2003. Janus, which had about $147 billion in assets before the trading scandal, had at least $40 billion withdrawals in the two years after settling allegations of trading abuses.
The 2003-2004 scandal was especially destructive, said Greenwald, because it came as investors were just beginning to recover from the steep decline in technology stocks. The technology-heavy Nasdaq Composite Index fell 67 percent from the end of 1999 to 2002, Bloomberg data show.
Mutual funds are facing a similar situation now, after investors fled stock funds following a 37 percent decline in the Standard & Poor’s 500 Index in 2008. The U.S. mutual-fund industry had $11.3 trillion in assets as of Sept. 30, according to the website of the Investment Company Institute, a Washington-based trade group.
Some mutual funds may be less affected by moves in a single stock because unlike hedge funds, most mutual funds don’t use leverage or hold concentrated portfolios, Geoff Bobroff, a money-manager consultant based in East Greenwich, Rhode Island, said in an interview.