U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19708 / May 22, 2006
SEC v. James Tambone and Robert Hussey, Civil Action No. 06-10885-NMG (District of Massachusetts)
SEC Refiles Action Against Two Former Columbia Executives for Conduct Relating to Mutual Fund Market Timing Arrangements
The Securities and Exchange Commission today announced that on May 19, 2006, it refiled an enforcement action against two former executives of Columbia Funds Distributor Inc. in connection with undisclosed market timing arrangements in the Columbia complex of mutual funds.
In its complaint, filed in federal court in Massachusetts, the SEC alleges that from 1998 and through 2003, James Tambone of Wellesley, the former Co-President of Columbia Funds Distributor, Inc., and Robert Hussey of Bedford, the former Managing Director for National Accounts, participated in a fraudulent scheme with Columbia Funds Distributor, which sold and marketed the Columbia funds, and with Columbia Management Advisors, Inc, the investment adviser to the funds. In connection with the scheme, the defendants reaped financial benefits by secretly entering into or approving arrangements with at least eight preferred customers allowing them to engage in frequent short-term trading to the potential detriment of other investors in the funds. In connection with certain of the arrangements, Tambone and Hussey accepted so-called "sticky assets" - long-term investments that were to remain in place in return for allowing the investors to actively trade in the funds.
The SEC alleges that although the defendants were responsible for and directed the firm's efforts to sell the Columbia funds to investors, they did not disclose to these investors the existence of these arrangements. Indeed, quite the contrary, in connection with selling the funds, the defendants knowingly allowed Columbia Funds Distributor to disseminate prospectuses that falsely represented that the funds did not permit or were otherwise hostile to market timing or other short-term or excessive trading because of its harmful effect on the funds. Further, Tambone signed hundreds of agreements with fund purchasers in which he expressly represented and warranted that the prospectuses were not misleading.
The SEC further alleges that Tambone and Hussey aided and abetted violations by Columbia Management Advisors, which breached its duty to act at all times in the best interests of the Columbia mutual funds and to provide full and fair disclosure of all material facts to investors. Columbia Management Advisors is a registered investment adviser that manages Columbia mutual funds. Columbia Funds Distributor is a registered broker-dealer that is the principal underwriter and entity responsible for selling the funds. During the relevant period, both were subsidiaries of FleetBoston Financial Corporation.
The specific charges against the defendants in the federal court action are that they violated Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aided and abetted Columbia Management Advisors Distributor's violations of Section 15(c)(1) of the Exchange Act, Columbia Management Advisors' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and the Columbia entities' violations of Section 10(b) and Rule 10b-5 of the Exchange Act. The SEC is seeking injunctive relief, disgorgement and civil penalties.
On February 9, 2005, the SEC had filed a complaint in the District of Massachusetts alleging claims against the defendants arising from the same conduct (Litigation Release No. 19069 (February 9, 2005)). On April 15, 2005, the defendants filed motions to dismiss the complaint. On January 27, 2006, the court (Judge Nathaniel Gorton) granted the defendants' motions and dismissed the complaint without prejudice. Among other things, the court found that the defendants could not be held primarily liable under Exchange Act 10(b) or Securities Act 17(a) for misrepresentations and omissions because the statements in the prospectuses could not be attributed to them.
On March 13, 2006, the SEC sought leave to file an amended complaint, and because the dismissal constituted a final judgment under First Circuit precedent, the SEC also filed a Fed. R. Civ. P. 60(b) motion to vacate the judgment on March 22, 2006. The defendants opposed the motion to vacate the judgment. On May 5, 2006, the court denied the motion to vacate, rendering moot the motion to amend. The court found while the SEC may have met the standard for a motion to amend, it did not show exceptional circumstances warranting the vacation of the judgment. However, the court also indicated that notwithstanding the court's dismissal of the initial complaint, the SEC could still bring amended claims in a new lawsuit.