SEC's Division of Enforcement Announces Agreement to Settle Civil Fraud Charges Against Fleet's Columbia Mutual Fund Adviser and Distributor for Undisclosed Market Timing
FOR IMMEDIATE RELEASE
Washington, D.C., March 15, 2004 - The Securities and Exchange Commission's Division of Enforcement today announced that it has reached an agreement in principle regarding its market timing lawsuit against two subsidiaries of FleetBoston Financial Corporation - Columbia Management Advisors, Inc. ("Columbia Advisors") and Columbia Funds Distributor, Inc. ("Columbia Distributor"). The Commission alleged in a February 24, 2004 civil complaint that these two entities allowed certain preferred mutual fund customers to engage in short-term and excessive trading, while at the same time representing publicly that such trading was prohibited. Columbia Advisors and Columbia Distributor have agreed, among other things, to pay $140 million in disgorgement and penalties, which will be used to reimburse injured fund shareholders, and to undertake several compliance and mutual fund governance reforms. Final settlement is contingent upon review and approval by the Commission.
Columbia Advisors and Columbia Distributor have agreed to:
- Payment of $70 million in disgorgement.
- Payment of $70 million in civil penalties.
- An order requiring Columbia Advisors and Columbia Distributor to cease and desist from violations of the antifraud and other provisions of the federal securities laws.
- Governance changes designed to maintain the independence of the fund boards of trustees and ensure the Columbia defendants' compliance with securities laws and their fiduciary duties.
- Retention of an independent consultant to review compliance policies and procedures of Columbia Advisors and Columbia Distributor, and recommend changes or enhancements, which must be implemented by both entities.
- Continued cooperation with the SEC staff in its ongoing investigation.
The Commission's complaint, filed in federal court in Boston alleged that, from at least 1998 through 2003, Columbia Distributor secretly entered into arrangements with at least nine companies and individuals allowing them to engage in frequent short-term trading in at least seven Columbia funds. The complaint alleged that, in connection with certain of the arrangements, Columbia Distributor and Columbia Advisors 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 complaint further alleged that Columbia Advisors knew and approved of all but one of the arrangements and allowed them to continue despite knowing such short-term trading could be detrimental to long-term shareholders in the funds. The complaint alleged that both defendants acted improperly in entering and accepting the short-term trading arrangements, because they were contrary to disclosures made in the prospectuses used to sell the mutual funds.
According to Stephen Cutler, Director of the SEC's Division of Enforcement, "This agreement accomplishes many important goals of the SEC's lawsuit. If finalized, it would (1) provide a mechanism to reimburse defrauded investors for the losses they sustained; (2) penalize the Columbia defendants for their misconduct; and (3) put in place a raft of compliance and corporate governance protections designed to ensure that the misconduct won't happen again."
Peter H. Bresnan, Acting District Administrator of the SEC's Boston District Office, said:
"Secretly preferring some customers over others has no place in the mutual fund business. The penalties imposed by the agreement should send a clear message to all market participants that such conduct will not be tolerated."
Columbia Advisors is a registered investment advisor that manages Columbia mutual funds, and Columbia Distributor is a registered broker-dealer that is the principal underwriter responsible for selling the funds. Today's actions reflect the coordinated efforts of the Securities and Exchange Commission and the New York Attorney General's Office.
The Commission's investigation is continuing.
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