Alliance Capital Management Will Pay Record $250 Million and Make Significant Governance and Compliance Reforms To Settle SEC Charges


Entire Amount Will Be Returned To Investors Who Lost Money Because of Firm's Illegal Market Timing Arrangements

Washington, D.C., Dec. 18, 2003 — The Securities and Exchange Commission today announced a settled enforcement action against Alliance Capital Management L.P. (Alliance Capital) for defrauding mutual fund investors by allowing market timing in certain of its mutual funds in exchange for fee-generating investments in other Alliance Capital investment vehicles.

The Commission ordered Alliance Capital to pay $250 million, consisting of $150 million in disgorgement and $100 million in penalties. All of the money will be distributed to the shareholders harmed by Alliance Capital's market timing arrangements. The Commission also ordered Alliance Capital to undertake certain compliance and fund governance reforms designed to prevent a recurrence of the kind of conduct described in the Commission's Order. The reforms will enhance the independence of the mutual funds' boards and strengthen oversight of Alliance Capital's compliance with the federal securities laws.

The Commission's Order finds that Alliance Capital entered into arrangements permitting market timing (short-term trading to exploit pricing inefficiencies), in certain of its mutual funds. In exchange, Alliance Capital solicited from these market timers long-term investments, so-called "sticky assets" or "legit assets," in its hedge funds and mutual funds. By virtue of these arrangements, Alliance Capital reaped additional management fees, but exposed its mutual funds to what it recognized as potential adverse effects of market timers. Alliance Capital breached its fiduciary duty to those funds and misled those who invested in them.

Stephen M. Cutler, Director of the SEC Division of Enforcement, said: "Alliance Capital violated the first rule for investment advisers - to protect the interests of the client. A violation of this fundamental trust warrants a most severe sanction, and the SEC's order reflects that. The size of the payment - the largest ever by a mutual fund adviser - also ensures full compensation to investors injured by these timing arrangements."

Mark K. Schonfeld, Associate Director of the Northeast Regional Office, said: "Advisers who put their own interests ahead of their clients' will pay a steep price. This resolution also brings real justice - every dollar of disgorgement and penalty will be returned to investors injured by the timing arrangements."

The Commission's Order makes the following factual findings:

  • At their height in 2003, Alliance Capital arranged over $600 million in market timing in its mutual funds. Its single biggest timer, Daniel Calugar, owner of Security Brokerage in Las Vegas, Nevada, peaked at $220 million of timing capacity in certain mutual funds; in exchange, Mr. Calugar invested in hedge funds run by some of the same portfolio managers overseeing the mutual funds. For example, Alliance Capital granted Calugar $150 million timing capacity (the right to make multiple roundtrip trades up to $150 million each) in the AllianceBernstein Technology Fund in return for a $30 million investment - a 5:1 ratio - in a hedge fund managed by the same portfolio managers.
  • Alliance Capital solicited shareholder approval to lift a restriction on futures trading in one of the funds by means of a misleading proxy. Alliance Capital failed to disclose that one reason for seeking to lift the restriction was to enable the portfolio manager to manage better the cash flows resulting from market timers.
  • Alliance Capital provided confidential information about the portfolio holdings of certain mutual funds to one of the timers, Canary Investment Management. The disclosure enabled Canary to profit from market timing in declining markets.

The Commission's Order finds that Alliance Capital violated Sections 204A, 206(1) and 206(2) of the Advisers Act of 1940 and Sections 17(d), 20(a) and 34(b) of the Investment Company Act of 1940 and Rules 17d-1 and 20a-1 thereunder, and requires Alliance Capital to cease and desist from violating these provisions.

Alliance Capital consented to entry of the Commission's Order without admitting or denying the findings.

In accepting the settlement, the Commission considered Alliance Capital's cooperation in this investigation, including reporting its discovery of possible misconduct to the Comission promptly, conducting a thorough and independent internal investigation, sharing the results of that investigation with the staff, obtaining the resignations of certain supervisory personnel and others, and implementing certain remedial actions.

The Commission's settlement does not require Alliance Capital to offer fee discounts to its mutual fund customers. In the attached statement, the Commission discusses why such relief would not serve its law enforcement objectives in this case.

The Commission's investigation of Alliance Capital and this enforcement action have been coordinated with the New York Attorney General's Office.

The Commission's investigation is continuing.

Contacts: Stephen M. Cutler (202-942-4540)
Linda Chatman Thomsen (202-942-4501)
Wayne M. Carlin (646-428-1510)
Mark K. Schonfeld (646-428-1650)

*  *  *  *  *

Statement of the Commission Regarding the Enforcement Action Against Alliance Capital Management, L.P.

Today we announce our settled enforcement action against Alliance Capital Management, L.P. ("Alliance Capital") in connection with its illegal market timing arrangements. The Commission's settlement requires Alliance Capital to pay a total of $250 million (including a penalty of $100 million), all of which is to be returned to investors harmed by the violations. This amount will provide those investors with full compensation for fund losses due to the illegal market timing arrangements. In addition, we are requiring Alliance Capital and its mutual fund boards to adopt significant governance and compliance reforms. These reforms are designed to prevent a recurrence of the kind of conduct described in our order.

The Commission's settlement does not require Alliance Capital to offer fee discounts to its mutual fund customers. We determined - unanimously - that such relief would not serve our law enforcement objectives in this case. There were no allegations that Alliance Capital's mutual fund fees were illegally high. This is a case about illegal market timing, not fees. Therefore, we see no legitimate basis for the Commission to act as a "rate-setter" and determine how much mutual fund customers should pay for the services they receive in the future from Alliance Capital. This decision is better left to informed consumers, independent and vigorous mutual fund boards, and the free market. Mandatory fee discounts would (i) require that customers do business with Alliance in order to receive the benefits of the discounts, and (ii) provide monetary relief to customers who were not harmed by the violations set forth in the order. That is why our efforts focused on providing full compensation to harmed investors and a significant upfront penalty.

Issues surrounding mutual fund fees are critically important. As part of our broad and unique rulemaking powers, we plan to take up these issues in the period ahead. We firmly believe that rules uniformly applicable to the entire industry are more desirable than a piecemeal approach that fragments the marketplace. The rulemaking process - with its attendant protections of notice and public comment - is a better way to address fee issues than the imposition of arbitrary discounts in individual enforcement actions about market timing. While we can all applaud fair and reasonable fees, we think the best way to ensure them is a marketplace of vigorous, independent, and diligent mutual fund boards coupled with fully-informed investors who are armed with complete, easy-to-digest disclosure about the fees paid and the services rendered.

See Also:  Adminstrative Proceeding Release No. IA-2205
Last modified: 12/18/2003