RS Investment Management to Pay $25 Million and Undertake Compliance Reforms to Settle SEC Market Timing Charges

FOR IMMEDIATE RELEASE
2004-142

Washington, D.C., Oct. 6, 2004 -- The Securities and Exchange Commission today charged investment adviser RS Investment Management L.P., CEO G. Randall Hecht, and former CFO Steven M. Cohen with favoring certain mutual fund investors by allowing them to engage in frequent short-term trading (market timing). According to the Commission, RS entered into secret agreements that permitted select investors to generate millions of dollars in trading profits at the potential expense of other shareholders, and allowed RS to reap substantial advisory fees.

RS, a San Francisco-based investment adviser for ten mutual funds, has agreed to pay $25 million to settle the Commission’s fraud charges, including disgorgement of $11.5 million and a civil penalty of $13.5 million. These amounts will be distributed to investors of mutual funds affected by the market timing. RS will also undertake significant compliance measures designed to protect against future violations. Hecht and Cohen have also agreed to pay monetary penalties and to other remedial actions.

Helane Morrison, District Administrator of the Commission’s San Francisco District Office, said: “Today’s action shows that the market timing abuses uncovered by regulators in recent months extend to relatively small boutique firms like RS.” RS has $6.7 billion in assets under management.

The Commission’s order finds that RS engaged in the following misconduct:

• The prospectus provided to investors in the RS mutual funds limited investors to four transfers of money (exchanges) between the funds, including RS’s money market fund, in a 12 month period. In addition, RS at times stopped investors from engaging in market timing in the funds.
   
• During at least 2000 through mid-2003, RS entered into undisclosed agreements allowing certain investors in its Emerging Growth Fund (EGF) to engage in unlimited trading, notwithstanding the prospectus restrictions. The trading was in substantial dollar amounts, ranging from $15 million to $65 million per trade. In several instances, the arrangements between RS and these select investors included an agreement that the investors invest a long-term (or sticky) investment in an RS fund, generating additional fees for the firm.
   
• In the fall of 2002, RS determined to reduce the amount of market timing in the EGF, restricting investors from engaging in frequent trading in the fund. Nonetheless, with the knowledge of Cohen and Hecht, RS entered into an agreement with a high net worth investor allowing it to continue to engage in unlimited trading in amounts of up to $65 million per trade. As part of the arrangement, the investor agreed to place a $130 million long-term asset into the EGF. Over the next nine months, the investor made approximately 80 exchanges (compared to the 4-exchange limitation in the prospectus), generating millions of dollars in trading profits.
   
• As a result of the various agreements, RS generated additional fees of at least $1.7 million between 2000 and 2003 from the market timing and long-term assets.

RS was charged with, among other things, violations of the antifraud provisions of the Investment Advisers Act of 1940. Without admitting or denying the Commission’s findings, RS has agreed to the entry of an order requiring it to pay $25 million in disgorgement and penalties, cease and desist from similar violations in the future, and undertake certain remedial actions.

Hecht was charged with assisting in RS’s violations described above, in that he authorized the fall 2002 arrangement with a high net worth investor, allowing it to continue its unlimited trading. Hecht is also charged with failing to disclose the arrangements and RS’s potential conflict of interest to the Funds’ Board of Trustees. Cohen is charged with assisting in RS’s violations, in that he knew of and authorized several trading arrangements which included the placement of sticky assets in exchange for unlimited trading and participated in deciding to allow or “kick out” certain market timers.

Without admitting or denying the Commission’s findings, Hecht and Cohen have agreed to pay civil penalties of $150,000 each. Under the terms of the settlements, Cohen will be suspended from association with an investment adviser or investment company for nine months, followed by a two-year suspension from serving as an officer or director of an investment adviser or investment company. Hecht, a part-owner of RS, has agreed to significant restrictions on his role at the firm, including not participating in the areas of public disclosure, marketing, shareholder trading, and compliance for 12 months, and has also agreed to resign as a trustee of the RS Investment Trust, the entity that issues and governs the Funds, among other relief.

The SEC's action was brought contemporaneously with a related action by the Attorney General of the State of New York.

For more information, contact:

Helane L. Morrison
District Administrator
(415) 705-2450

Marc J. Fagel
Assistant District Administrator
(415) 705-2449

United States Securities and Exchange Commission
San Francisco District Office