The Sec Trails A Value HunterMichele Galen and Laura Zinn
Michael Price prides himself on being a "value" investor, the kind who roots around to discover a stock or bond's intrinsic worth. His Mutual Series Fund group of mutual funds has gained a savvy reputation, though the group has been lagging behind the broad market in recent years.
Now, just as his funds are performing smartly again, Price may have more than value-hunting to worry about. BUSINESS WEEK has learned that the Securities & Exchange Commission's New York office last September opened an informal inquiry into Price's trading in R. H. Macy & Co. securities. It's also probing trading by Mutual Series, which includes Mutual Shares, Mutual Qualified, and Mutual Beacon funds and controls $4.1 billion in assets.
According to an SEC memorandum, dated Apr. 1, the agency is looking into whether Mutual Series traded Macy's securities with inside information. The SEC also wants to know whether Price, who is Mutual Series' chairman and a Macy's director, violated conflict-of-interest laws by trading at the same time the funds were trading in the same securities.
So far, the SEC has received trading records and related documents from the funds and Price, which they volunteered to hand over. Price confirms the informal inquiry but says that he is unaware of its focus. And he vehemently disputes that he or the funds did anything improper. Ron Geffner, an SEC attorney handling the case, declined to comment.
The current investigation is not Price's first brush with regulators. In December, 1988, the money manager and his late mentor, Max L. Heine, agreed, without admitting liability, to be censured by the SEC for not fully disclosing that they received approximately 50% of the brokerage commissions--or some $2.4 million--paid by the mutual funds to an affiliated brokerage firm from January, 1985, to March, 1987.
At the time, the SEC also examined the propriety of investments by Price and others in securities purchased by the funds, including a 1986 purchase of Macy's preferred stock. Price says a 1987 internal review resolved "the issues raised by these purchases." But as part of the SEC settlement, Price pledged to clarify the funds' ethics codes regarding "contemporaneous transactions in securities" by a fund and persons with access to its investment decisions.
The current investigation grew out of an SEC staff examination conducted from Oct. 10, 1990, to Nov. 27, 1990. According to the SEC memo, the exam revealed that Price, "on more than one occasion, executed trades at approximately the same time and in the same securities as Mutual Series." The trading included the Macy's securities: From his seat on the board, Price would have access to inside information.
The agency is studying whether such trading amounts to an illegal conflict of interest in violation of section 17(d) of the Investment Company Act. "The danger," says Tamar Frankel, a Boston University law professor who wrote a treatise on the act, is that the money manager would "manipulate the trading in the fund's portfolio to profit his personal portfolio," such as by selling before the fund. Price says his own trading is "strictly governed" by the funds' ethics code. Macy's declined to comment.
The SEC also is looking into "allegations" that Mutual Series traded Macy's securities on the basis of inside information about the retailer's Jan. 27 bankruptcy filing. In June, 1991, Mutual Series owned two classes of Macy's bonds and 1.1 million shares of Macy's preferred stock. But by December, a few weeks before the Chapter 11 filing, Mutual Series did not list Macy's bonds in its portfolio. Price says that the fund "intermittently sold" the bonds throughout 1991, with the last sale on Nov. 4, 1991, but that he had "no information" that Macy's planned to file for bankruptcy. Price says he "routinely consulted" with lawyers about the propriety of Macy's trades, and that neither he nor the funds "ever traded Macy's securities on the basis of nonpublic information."
FUZZY LAW. Nothing may come out of the inquiry. The SEC would face an uphill battle in proving that any trading actually violated the law. Trading on the basis of inside information is clearly illegal when equity securities are involved, but the law is murky when applied to debt. The law governing "joint" trading by fund managers is equally fuzzy. Moreover, the probe is only in an early stage. As of Apr. 1, it hadn't been formally approved by the SEC in Washington.
Still, the memo notes, the New York office intends to ask Macy's for a chronology of events leading to its bankruptcy filing and compare it with the funds' trading in Macy's securities. The office also intends to request, "if warranted," Michael Price's personal testimony.