Massachusetts Financial Services Co. Will Pay $225 Million and Make Significant Governance and Compliance Reforms To Settle SEC Fraud Charges Concerning Mutual Fund Market Timing


MFS's Two Top Executives Prohibited From Serving as Officers or Directors of Any Investment Adviser for Three Years

Entire Amount Paid To Be Returned to Investors Harmed by Market Timing

Washington, D.C., Feb. 5, 2004 -- The Securities and Exchange Commission today announced a settled enforcement action against Massachusetts Financial Services Co. (MFS), its chief executive officer John W. Ballen, and its president and chief equity officer Kevin R. Parke, for violating federal securities laws by allowing widespread market timing trading in certain MFS mutual funds in contravention of those funds' public disclosures.

The Commission censured MFS and ordered it to pay $225 million, consisting of $175 million in disgorgement and $50 million in penalties. The Commission's Order further requires MFS to undertake certain compliance and mutual fund governance reforms designed to enhance the independence of mutual fund boards of trustees and strengthen oversight of MFS's compliance with the federal securities laws.

For their roles in the misconduct, the Commission prohibited MFS CEO Ballen and president Parke from serving as an officer or director of any investment adviser and from serving as an employee, officer, or trustee of any registered investment company for three years. In addition, the Commission's order places certain restrictions on the duties Ballen and Parke can perform during that period. The Commission also suspended Ballen and Parke from association with any investment adviser or registered investment company for nine months and six months, respectively, and ordered each to pay a penalty of $250,000 and disgorge over $50,000 in ill-gotten gains derived from MFS's market timing practices. All of the money paid by MFS, Ballen, and Parke will be distributed to harmed shareholders.

According to the Commission Order, beginning in late 1999, MFS began including disclosures in its retail mutual fund prospectuses that prohibited market timing trading in those funds. Contrary to those disclosures, MFS internally categorized certain of its retail funds as "Unrestricted Funds" with respect to market timing, and knowingly permitted widespread market timing in these funds. Ballen and Parke implemented MFS's undisclosed policy permitting market timing trading in its Unrestricted Funds during the same period that they signed registration statements for these funds that stated they prohibited market timing.

Stephen M. Cutler, Director of the SEC Division of Enforcement, said: "MFS and its top executives failed to put the interests of their clients first. This action reflects the Commission's continuing effort to aggressively pursue fraud in the mutual fund industry."

Peter H. Bresnan, Acting District Administrator for the SEC's Boston District Office, said: "The $225 million payment to be made by MFS ensures compensation to investors injured by MFS's undisclosed market timing practices, and sends the message that such behavior will be firmly punished."

Among other things, the Commission's Order makes the following factual findings:

  • Beginning as early as September 1999, the MFS Retail Funds, including the Unrestricted Funds, adopted the following disclosure concerning market timing in their prospectuses: "The MFS Funds do not permit market-timing or other excessive trading practices." In April 2002, MFS began to modify the foregoing prospectus disclosure in its MFS Retail Funds with the following statement: "The MFS Funds do not permit market timing or other excessive trading practices that may disrupt portfolio management strategies and harm fund performance." This modified language appeared in the prospectuses for all MFS Retail Funds until at least November 2003.
  • The MFS prospectus disclosures described above were misleading because MFS permitted widespread market timing trading in its Unrestricted Funds from at least late 1999 through October 2003. According to internal estimates reported to Ballen and Parke in September 2003, known market timers at MFS held approximately $2 billion in assets as of May 31, 2003. This amount constituted approximately 5 percent of all assets in MFS's Unrestricted Funds, which had assets of approximately $40 billion as of April 30, 2003.
  • MFS not only permitted market timing in its Unrestricted Funds, but it also directed known market timers into its Unrestricted Funds. Beginning at least as early as July 2001, MFS routinely provided certain broker-dealers with its internal policy allowing market timing in the Unrestricted Funds, and routinely directed known market timers to the Unrestricted Funds.
  • Late traders, or those who place mutual fund trades after the close of the market but illegally receive fund prices calculated for trades placed prior to the market's close, were among those engaging in excessive market timing trades in the Unrestricted Funds. Certain late traders reaped substantial profits from their transactions in the Unrestricted Funds. Indeed, it appears that the majority of the harm caused to shareholders in the Unrestricted Funds was the result of illegal late trading by a number of market timers. Respondents did not detect the late trading and further did not identify the full extent of the harm caused to the Unrestricted Funds by market timing transactions that were allowed in contravention of the funds' prospectus disclosures.

The Commission's Order finds that MFS, Ballen, and Parke violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 34(b) of the Investment Company Act of 1940, and requires them to cease and desist from violating these provisions.

MFS, Ballen, and Parke consented to entry of the Commission's Order without admitting or denying the findings.

The Commission's investigation of MFS and this enforcement action have been coordinated with the New York Attorney General's Office and the New Hampshire Bureau of Securities Regulation. The Commission's investigation is continuing.

Contact persons:

Stephen M. Cutler (202-942-4540)
Peter H. Bresnan (202-942-4788)
John T. Dugan (617-424-5900, ext. 688)

See Also:  In the Matter of Massachusetts Financial Services Co. et al.: Release No. IA-2213
Last modified: 2/5/2004