Ex-fund execs cited

Three former Janus managers accused of market timing by SEC

James Paton, Rocky Mountain News

Tuesday, August 1, 2006

The Securities and Exchange Commission on Monday nailed three former Janus Capital Group executives - including star portfolio manager Warren Lammert - accusing them of allowing abusive mutual fund trading.

The allegations come nearly three years after New York Attorney General Eliot Spitzer unveiled a probe into improper trades. More than two years have passed since Janus settled the case for $226 million.

Denver-based Janus has moved beyond the embarrassing episode, which tarnished the company's reputation and sent it into a deeper hole after huge losses in the bear market of late 2000, 2001 and 2002.

But the story is not over for the three ex-officials, Lammert, Lars Soderberg and Lance Newcomb. The SEC said it is now seeking sanctions and civil penalties against them.

Mark Whiston, Janus' chief executive officer from late 2002 to 2004, has not been implicated.

The former boss of the now defunct Invesco Funds Group in Denver, Ray Cunningham, was not so lucky. In 2004, he agreed to pay a $500,000 fine and to be banned from the industry for two years to settle charges he signed off on a secret trading scheme.

The SEC, which followed Spitzer into the investigation, found that Janus and a number of other companies, including Putnam Investments and Invesco, had permitted favored clients to dart in and out of mutual funds at the expense of ordinary, buy-and-hold investors.

In return for the privilege of being able to rapidly trade Janus funds, the clients parked cash in other products, generating fees for the firm, the SEC said in a prior filing.

Janus at the same time said it would prohibit frequent trading, a practice known as market timing, because it could drive up expenses for long-term investors and disrupt a portfolio manager's strategy.

In November 2001, one large market timer - brokerage firm Trautman Wasserman - invested in the Janus Mercury Fund, Lammert's portfolio, the SEC said. Between late 2001 and September 2003, the firm's customers made more than 500 trades, including purchases of roughly $2.5 billion, the SEC added.

By the summer of 2003, the client had around $263 million in Janus funds, according to the SEC.

Janus spokeswoman Shelley Peterson declined to comment, saying, "It's a matter between the individuals and the SEC. Janus settled the case over two years ago."

Lammert, who joined Janus in 1987 and ran the Janus Mercury Fund for a decade until he stepped down in early 2003, did not return a message left at his Boston-based hedge fund company, Granite Point Capital Management.

A Yale University graduate, Lammert also is a co-founder of a group called the Epilepsy Therapy Development Project.

Lance Newcomb, reached by telephone on Monday afternoon, defended himself.

"I deny I did anything improper," said Newcomb, an institutional sales manager who departed in late 2003. "I didn't originate, negotiate or approve any of the market-timing agreements at Janus."

The SEC, however, said that Newcomb struck a deal with at least one investor giving the client a chance to make rapid trades in a Janus fund in exchange for a long-term investment in another portfolio.

Lars Soderberg, executive vice president of institutional services until July 2004, could not be reached for comment.

Soderberg early this year stepped down as a director of Dividend Capital Trust, a Denver-based real estate investment trust, "to dedicate more time to his other business interests," according to a news release issued by the company in January.

A hearing will be scheduled before a judge to give the executives a chance to dispute the allegations and to determine possible sanctions, according to the SEC.

SEC officials in Denver could not be reached for comment.

About market timing

• What is market timing? It is short-term darting in and out of a given fund's shares in hopes of exploiting an inefficiency in the fund's share price. This is usually done with foreign funds, where a fund's shares, priced at the end of the U.S. trading day, might not reflect recent moves in the fund's holdings overseas.

• What is a market timer? A market timer would buy at a so-called stale share price, for example, then dump the shares when they are re-priced, higher, the next day. Funds often prohibit or discourage investors from this practice.

• How do these practices hurt long-term fund shareholders? Mutual funds are designed to offer long-term investors of modest means cheap access to a broad portfolio of securities chosen by a trained professional. When large amounts of money flit in and out of funds, however, that trading can ratchet up a fund's costs quickly, whittle its tax efficiency and disrupt a fund manager's strategy.

Rocky Mountain News

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patonj@RockyMountainNews.com or 303-892-2544