INVESCO May Be in the Crosshairs

New York Attorney General Spitzer and the SEC will likely file civil charges against the fund firm for market-timing-related activities

Another shoe may be about to drop in the mutual-fund scandal. BusinessWeek Online has learned that New York Attorney General Eliot Spitzer and the U.S. Securities & Exchange Commission plan to file civil charges this week against INVESCO Funds, a unit of Amvescap (AVZ ). The complaint is expected to center on INVESCO's dealings with Canary Capital Partners, the New York-based hedge fund whose alleged market-timing trading activities initially sparked Spitzer's growing investigation into several other mutual funds.

Several former INVESCO employees have told BusinessWeek Online that Canary Capital traded in and out of several INVESCO funds, including sector and growth funds. Market timers rapidly buy and sell mutual-fund shares to capture price changes of securities in a fund's underlying portfolio. While market timing isn't illegal, the frequent trading can eat into overall returns and cost investors in lost gains.

The former INVESCO employees say fund managers at the Denver-based investment firm were told by top executives to allocate as much as 5% of their fund portfolios for market-timing money. In addition, these sources say, the managers were instructed to use exchange-traded mutual funds (ETFs) to manage the rapid cash flows. "They were desperate for asset growth," one former employee says. Spitzer previously sought trading information from INVESCO, according to the company.


  It's unclear which INVESCO funds were involved, but several had high redemptions last year, including INVESCO Technology, which had a 518% redemption rate, and INVESCO Dynamics, which had hit 436%, according to data from Lipper Analytical Services.

INVESCO has responded to the SEC in a so-called Wells submission. The firm says the submission "contains facts, information on industry practices, and public-policy considerations that demonstrate compliance with its prospectuses, legal obligations, and most importantly, its fiduciary duty to clients." When asked for comment, INVESCO Funds Group said it hasn't engaged in any wrongful conduct harmful to shareholders and that it will vigorously contest any charges, according to a spokesperson.

"We want to emphasize that INVESCO Funds Group continues to believe that the actions taken by our funds have been consistent at all times with the best interests of fund shareholders," spokesperson Ivy McLemore adds.


  As for Canary Capital, it "is cooperating with the ongoing inquiries," says Gary Naftalis, an attorney Kramer, Levin, Naftalis & Frankel, a New York law firm that represents Canary Capital.

In September, Spitzer's office reached a $40 million settlement with Canary Capital, which implicated four other fund companies -- Bank of America (BAC ), Bank One (ONE ), Janus Capital Group (JNS ), and Strong Capital Management. But judging from the latest anticipated allegations, Spitzer and the SEC aren't through with Canary just yet.

By Lauren Young in New York, with Emily Thornton

Edited by Douglas Harbrecht

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