 | Has your fund ever broken the law, or otherwise been in serious legal trouble? Busted! is a permanent archive of mutual fund malfeasance, which can help you steer clear of managers that have a history of legal and ethical lapses. The information for each fund included in this archive is generally organized as follows:
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(now Davis Opportunity) |
| If you believe other managers belong in the Busted! archive, because they've been subject to legal or regulatory action, please let us know. We'd be delighted to give you credit for the tip, if you wish. |
| "The Securities and Exchange Commission announced settled fraud charges against two subsidiaries of Citigroup, Inc. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999. The two subsidiaries named as respondents in the action are Citigroup Global Markets, Inc. and Smith Barney Fund Management LLC, the investment adviser to the mutual funds. In an Order issued today, the Commission found that the respondents misrepresented and omitted material facts when recommending to the boards of the mutual funds that the funds change from the third party transfer agent they previously used to a transfer agent that was a Citigroup affiliate....
According to the Commission’s Order, the investment adviser in this case placed its interest in making a profit ahead of the interests of the mutual funds it had a duty to serve...In this case, the adviser recommended that the mutual funds contract with an affiliate of the adviser to serve as transfer agent without fully disclosing to the mutual funds’ boards that most of the actual work was to be done under a subcontract arrangement that respondents had negotiated with the mutual funds’ existing third party transfer agent at steeply discounted rates. Rather than passing the substantial fee discount on to the mutual funds, the respondents, through the affiliated transfer agent, took most of the benefit of the discount for themselves, reaping nearly $100 million in profit at the funds’ expense over a five year period... |
| "The Commission's administrative order against Columbia Advisors and
Columbia Distributor finds 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. 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.
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 special
arrangements were never disclosed to long-term shareholders or to the
independent trustees of the Columbia funds.
In addition to trading made pursuant to specific arrangements, the Commission's order finds that Columbia allowed or failed to prevent hundreds of other accounts from engaging in a practice of short-term or excessive trading. Many of the arrangements and trades were directly contrary to representations made in fund prospectuses that the funds did not permit short-term or excessive trading. By placing their own interests in generating advisory fees and commissions from short-term or excessive trading above the interests of long-term shareholders to whom this trading posed a risk of harm, and by failing to disclose these arrangements and trading, Columbia Advisors and Columbia Distributor engaged in fraudulent conduct and Columbia Advisors breached its fiduciary duty to act at all times in the best interests of the Columbia Funds' shareholders." |
| "The Securities and Exchange Commission today charged San Francisco-based mutual fund adviser Fremont Investment Advisors with entering into improper and undisclosed agreements that allowed favored large investors to engage in rapid short-term securities trading known as market timing. Also charged by the Commission for their role in Fremont's improper market timing arrangements were former President and CEO Nancy Tengler and former Vice President of Institutional Sales Larry Adams. In addition to the market timing charges, the Commission charged Fremont for allowing mutual fund trades to be placed after the 4:00 p.m. market close.
Fremont, a firm that managed 13 mutual funds during the relevant period and has approximately $2.8 billion in assets under management, has agreed to pay $4.146 million to settle the Commission's fraud charges. Tengler has also agreed to settle the Commission's action, agreeing to pay $127,000 in disgorgement and penalties and to be suspended from the industry for six months. ... According to the Commission, Fremont's mutual fund prospectus prohibited market timing, and the firm enforced this policy by employing a "timing cop" to monitor and block excessive trading. Notwithstanding this policy, Fremont entered into undisclosed agreements in 2001 and 2002 allowing certain large investors to engage in market timing in Fremont's Global and U.S. Micro-Cap Funds. The Commission's order found that one of these agreements included a requirement that the investor place a multimillion-dollar long-term investment (or "sticky asset") in another Fremont fund, one recently established and co-managed by then-CEO Nancy Tengler. The Commission alleges that former Sales VP Larry Adams crafted the agreement, and finds that Tengler allowed the arrangement to go forward. The improper market timing arrangements generated additional fees of at least $170,000 for Fremont between 2001 and 2002, while allowing significant growth in the size of the fund established by Tengler. The Commission also found that a Fremont employee improperly authorized a brokerage firm to place mutual fund orders after the 4:00 p.m. Eastern Time market close, while still receiving the current day's price. This arrangement conferred an unfair advantage upon the broker's customers, allowing them the opportunity to profit from post-market close information and stale prices at the expense of other Fremont shareholders." ... |
| "The Securities and Exchange Commission today announced simultaneously settled enforcement actions against Invesco Funds Group, Inc. (IFG), AIM Advisors, Inc. (AIM Advisors), and AIM Distributors, Inc. (ADI). The Commission issued an order finding that IFG, AIM Advisors, and ADI violated the federal securities laws by facilitating widespread market timing trading in mutual funds with which each entity was affiliated.
The settlements require IFG to pay $215 million in disgorgement and $110 million in civil penalties, and require AIM Advisors and ADI to pay, jointly and severally, $20 million in disgorgement and an aggregate $30 million in civil penalties. ... Among other things, the Commission’s orders concerning IFG and [CEO Raymond] Cunningham set forth the following factual findings:
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| "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... ... The Commission’s order finds that RS engaged in the following misconduct:
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| "The Securities and Exchange Commission today filed a complaint in United States District Court seeking injunctive and other relief against PIMCO Advisors Fund Management LLC (PAFM), PEA Capital LLC (PEA), PIMCO Advisors Distributors LLC (PAD), Stephen J. Treadway, the chief executive officer of PAFM and PAD as well as the chairman of the board of trustees for the PIMCO Funds: Multi-Manager Series, and Kenneth W. Corba, PEA's former CEO, alleging violations of the antifraud and other provisions of the federal securities laws in defrauding PIMCO mutual fund investors, in connection with an undisclosed market timing arrangement with Canary Capital Partners LLC. According to the complaint, from February 2002 to April 2003, Canary engaged in approximately 108 round-trip exchanges in an aggregate amount of over $4 billion in several PIMCO Funds pursuant to its special market timing arrangement.
PAFM is an investment adviser for the PIMCO Funds: Multi-Manager Series, PEA is the investment sub-adviser for several of the PIMCO Funds, and PAD is a broker-dealer that serves as the distributor for the PIMCO Funds. The Commission's complaint, filed in United States District Court in Manhattan, alleges as follows. "Market timing" refers to the practice of short term buying and selling of mutual fund shares. From February 2002 to April 2003, the PIMCO Funds' advisers provided "timing capacity" in their mutual funds to Canary in return for long-term investments (referred to as "sticky assets") in a mutual fund and a hedge fund from which PAFM and PEA earned management fees. The prospectuses for the mutual funds failed to disclose to investors that an agreement had been made to permit timing in the funds in exchange for sticky assets. In addition, the prospectuses also gave the misleading impression that the PIMCO mutual funds discouraged timing. At the height of the agreement, Canary used over $60 million in timing capacity in several different mutual funds and invested $27 million in sticky assets into a mutual fund and a hedge fund. Even as it allowed Canary to engage in this market timing activity, the distributor of the PIMCO Funds, PAD, simultaneously prevented numerous other shareholders from engaging in the same rapid trading as Canary by issuing warning letters, freezing accounts, or blocking trades. For instance, in 2002 PAD froze nearly 400 accounts because of market timing or frequent trading in those accounts. Finally, PEA disclosed nonpublic portfolio holdings to the broker-dealer that executed Canary's trades. Stephen J. Treadway, age 56, of New York, N.Y., the CEO of PAFM and PAD as well as the chairman of the board of trustees for the PIMCO Funds: Multi-Manager Series, approved the market timing arrangement in approximately January 2002 but did not disclose his knowledge of the arrangement to the board of trustees until approximately September 2003. Kenneth W. Corba, age 51, of Greenwich, Conn., the former CEO of PEA, negotiated and approved the timing and sticky asset arrangement with Canary. He was the portfolio manager for the PIMCO Growth Fund, which provided Canary with $30 million in market timing capacity, and for the PIMCO Select Growth Fund, which received $25 million in sticky assets from Canary." |
| "Under terms of the settlement, Janus has agreed to pay $50 million in restitution and disgorgement to injured investors, $50 million in civil penalties, and $125 million in a reduction of fees charged to investors over a five-year period. In addition, Janus has agreed to pay $1 million to be held in trust by the Colorado Attorney General to be used for consumer and investor education and future enforcement activities.
Market timing activity within Janus funds was uncovered during Attorney General Spitzer's investigation of Canary Capital Partners in the summer of 2003. Since that time, coordinated investigations by the regulators revealed that Janus entered into a series of agreements with select investors which permitted these preferred investors to engage in improper, frequent short-term trading of Janus mutual funds while diluting the returns of other fund shareholders. Attorney General Salazar began his own inquiry of market timing abuses at Janus in October. The agreements Janus made with timers were not disclosed to long term investors. On the contrary, statements contained in prospectuses sent to investors stated that "the Funds are not intended for market timing or excessive trading," and outlined a series of measures to "deter these [market timing] activities." |
| "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. " |
| "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." |
| "...Putnam has agreed to undertake significant and far-reaching
corporate governance, compliance, and ethics reforms. Putnam has also
agreed to a process for calculating and paying restitution for losses
attributable to excessive short-term and market timing trading by its
employees. The amount of civil penalty and other monetary relief to be paid
by Putnam remains open and will be determined at a later date.
...the Commission found that Putnam committed securities fraud by failing to disclose potentially self-dealing securities trading by several of its employees. The Commission also found that Putnam failed to take adequate steps to detect and deter such trading activity through its own internal controls and its supervision of investment management professionals. By virtue of this conduct, Putnam breached its fiduciary duties in violation of, among other things, the antifraud provisions of the Advisers Act. Putnam consented to the entry of the Commission's order without admitting or denying its findings, but has agreed not to contest the findings in connection with the later determination of a penalty and other monetary relief." |
| On July 31, the Commission instituted and simultaneously settled cease-
and-desist and administrative proceedings against John McStay Investment
Counsel, L.P. (JMIC), a Dallas-based investment adviser registered with
the Commission. In settling the matter, JMIC consented to a censure and
cease-and-desist order (Order), and agreed to pay a $200,000 civil
penalty and fulfill certain undertakings, including the hiring of a
consultant to evaluate JMIC's calculation and disclosure of the impact
of IPO stock on its clients' investment performance.
The Commission finds in its Order that JMIC was responsible for three material disclosure failures. First, the Commission finds that JMIC failed to disclose adequately to its advisory clients JMIC's modification, in December 1996, of its scarce IPO allocation procedure. The change preferentially benefited the mutual fund JMIC managed, the Brazos Funds, by allocating to Brazos - to the exclusion of JMIC's private advisory clients - IPO stock of insufficient total value to distribute broadly to its clients. Second, the Commission finds that JMIC failed to disclose the impact of IPO stock on Brazos' exceptional initial performance, and failed to disclose the possibility that Brazos would be unable in future years to sustain its stellar performance as IPO returns came to represent a diminishing percentage of Brazos' growing asset base. Finally, the Commission finds that JMIC failed to disclose a potential conflict of interest posed by the JMIC managers' personal investment in Brazos shortly after the change in IPO allocation procedure. The Commission finds in the Order that JMIC willfully violated Section 206(2) of the Investment Advisers Act and that JMIC caused and willfully aided and abetted Brazos' violation of Section 34(b) of the Investment Company Act. Pursuant to the Order, JMIC is censured, and required to cease and desist from committing or causing any violations, and any future violations of these provisions. JMIC neither admits nor denies the Commission's findings. (Rels. IA-2153; IC-26142; File No. 3-11197) |
| On July 31, the Commission instituted public administrative and cease-
and-desist proceedings against Nevis Capital Management, LLC (Nevis
Capital), a registered investment adviser, its President, David R.
Wilmerding, III (Wilmerding), and its Executive Vice-President, Jon C.
Baker (Baker), all of the Baltimore, Maryland area, for alleged
violations of the antifraud and reporting provisions of the federal
securities laws relating to their initial public offering (IPO)
allocation practices and disclosures. This matter, which arose from a
routine regulatory examination, involves fraudulent and deceptive
conduct by Nevis Capital, Wilmerding and Baker that served to benefit
themselves, to the detriment of investors.
In the Commission's Order, the Division of Enforcement (the Division) alleges that between December 1998 and December 1999, Nevis Capital, Wilmerding and Baker inequitably allocated IPO shares to only two of their approximately 105 clients, the Snowdon Limited Partnership (Snowdon) and the Nevis Fund. Nevis Capital and Wilmerding further falsely stated in their Jan. 28, 1999, Form ADV amendment that all clients would be treated equally, on a pro rata basis, when, in fact, they had an undisclosed policy to allocate IPOs only to Snowdon and the Nevis Fund. The Division alleges that the IPO shares had a significant impact on the performance of Snowdon and the Nevis Fund, which also benefited Nevis Capital, Wilmerding and Baker, at the expense of their other clients. In total, Nevis Capital received approximately $2,600,000 in fees as result of its allocation of IPOs to Snowdon and the Nevis Fund. The Division further alleges that the Nevis Fund's exceptional cumulative returns of 90.1%, 154.6% and 286.5 % as of May 31, 1999, Sept. 30, 1999, and Dec. 31, 1999, would have been -5%, -3.6% and 41% without first-day IPO gains. The Division alleges that between December 1998 and July 2000, Nevis Capital, Wilmerding and Baker misrepresented the reasons for the Nevis Fund's performance in its prospectus, annual and semi-annual reports and advertisements, claiming that the Fund's returns were attributable to their long-term investment strategy and failing to disclose that the Nevis Fund's returns were primarily attributable to IPO investments. Based upon the foregoing conduct, the Division alleges that Nevis Capital, Wilmerding and Baker willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 34(b) of the Investment Company Act of 1940; Nevis Capital willfully violated and Wilmerding and Baker willfully aided and abetted and caused Nevis Capital's violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule 206(4)-1(a)(5) thereunder; and Nevis Capital and Wilmerding willfully violated Section 207 of the Advisers Act. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Nevis Capital, Wilmerding and Baker an opportunity to respond to the allegations against them, and to determine whether any remedial action should be ordered, and disgorgement and/or penalties imposed, by the Commission. (Rels. 33-8261; 34-48262; IA-2154; IC-26144; File No. 3- 11201) |
| On April 29, the Commission issued a cease-and-desist Order against Baron Capital, Inc., a broker-dealer, its CEO, Ronald S. Baron, and two
of its traders, David Schneider and Susan Blenke, for engaging in the
unlawful practice of "marking the close" of a NYSE-listed stock. Ronald
Baron manages approximately $8.6 billion through various investment
advisory affiliates. Collectively, the respondents are ordered to pay
$2.7 million in penalties. The respondents consented to entry of the
Commission's Order without admitting or denying the findings.
"Marking the close" is the manipulative practice of attempting to influence the closing price of a stock by executing orders at or near the close of the market. The Commission's Order finds that Baron Capital marked the close of Southern Union Company (SUG) stock in October 1999. Ronald Baron directed the traders to purchase the stock and Schneider and Blenke placed the orders with a broker-dealer on the NYSE floor. The findings in the Commission's Order are based in part on telephone conversations recorded by Baron Capital's own recording system in which Baron, Schneider and Blenke discussed the purchases of SUG stock during the relevant period. At the time of the misconduct, client accounts managed by Baron's investment advisory affiliates owned more than 10% of SUG's outstanding shares. Pursuant to a merger agreement, during a ten-day period in October 1999, the average closing price of SUG would determine the cash and stock consideration SUG would pay to consummate a pending corporate acquisition. Baron Capital influenced the closing price of SUG stock during the pricing period by ordering the execution of purchase orders in SUG at or near the close of the market. SUG's average closing price during the ten-day pricing period was higher than SUG's average closing price during the preceding ten trading days. Had the average closing price during the pricing period not increased as it did, SUG would have been required to pay millions of dollars more in cash (instead of SUG stock) for the acquisition. Baron, Schneider and Blenke engaged in numerous telephone conversations in which they discussed Baron Capital's purchases of SUG during the pricing period. For example, on October 22, 1999, Baron instructed Blenke to "do your buying today, and the end of the day, just buy [SUG] up into the twenties . . .. You know, 20¼, 20½, something like that." Baron explained that Blenke should "[u]se the 20½ top at the end of the day . . . like the last half-hour or something like that." Blenke responded affirmatively. Later on the same day, at approximately 12:20 p.m., Baron told Schneider that he "would like to see [SUG] a little bit higher here . . .. About 20¼, 20½, something like that." At the time, SUG was trading at $19.8125 per share. Schneider asked, "How many more days of this do we have to go?" Baron responded, "Well this is four days so far . . .. Let's see that's 15, the 18th, 19th, 20th, 21st, this is the fifth day. That's fifteen days." Schneider then asked, "Okay, and it's the closing price that matters, right?" "Yeah, exactly," Baron replied. Blenke relayed Baron's instructions to the order clerk on the floor of the NYSE, "by the end of the day, buy 34,600 up to 20½." The clerk responded, "You want to take it up to 20½?" Blenke said "Yup," and noted moments later that "I had trouble yesterday when it didn't close where I wanted it to close so make sure it closes . . .." The clerk asked, "Where do you want [it], where would you like it to close ultimately?" Blenke responded "20 and ½." Also on Oct. 22, 1999, Schneider told another Baron Capital employee that Baron "wants it to close at 20 and ½ today." Schneider further explained that "there's a deal, and the, the lower it goes, the more [Baron] gets diluted.. [H]e'd like it to close at 20 and ½." Referring to the pricing period, Schneider added, "he's gonna buy this thing for 10 days, and he's already bought it for the last 4 or 5 days . . .." Later that day, Baron Capital purchased 49,600 shares of SUG during the last twenty minutes of the trading day - including 15,000 shares at 4:00 p.m. - at increasingly higher prices ranging from $20 to $20.50 per share. SUG closed for the day at $20.50 per share on Baron Capital's purchase. The Commission's Order finds that Baron Capital willfully violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934, which prohibits brokers and dealers from using "any manipulative, deceptive, or other fraudulent device or contrivance" in connection with securities transactions. The Order finds that Ronald Baron, Schneider and Blenke willfully aided and abetted and caused Baron Capital's violation. The Order requires Baron Capital, Baron, Schneider and Blenke to cease and desist from committing or causing any violations and any future violations of Section 15(c)(1) of the Exchange Act. The Order also censures each of the Respondents and imposes civil monetary penalties of $2,000,000 for Baron Capital, $500,000 for Ronald Baron, $125,000 for David Schneider and $75,000 for Susan Blenke. Baron Capital has also undertaken new policies and procedures concerning end of day trading and hired a new compliance officer. The Commission acknowledges the assistance of the New York Stock Exchange in this matter. (Rel. 34-47751; File No. 3-11096) |
| On September 4, the Commission ordered Davis Selected Advisers-NY, Inc.
(DSA-NY) to cease-and-desist from violating reporting provisions of the
federal securities laws and to pay a $10,000 civil penalty for failing
to disclose to the investing public material information regarding IPO
trading for a fund client. DSA-NY, a New York-based investment adviser,
consented to the entry of the Commission's order without admitting or
denying the findings.
The order finds that during 1999 and 2000 DSA-NY caused the Davis Growth Opportunity Fund to engage in short-term IPO trading and failed to disclose material facts concerning the trading. Specifically, the order finds that DSA-NY caused the Fund to trade in 182 "hot IPOs" during the technology-related IPO "mania" of this period, and that in almost all instances, the shares were flipped, or sold the same or the next trading day, with the Fund realizing substantial profits on the vast majority of the trades. The order finds also that in 1999 the Fund's net profit from IPO trading was over $6.7 million, approximately 22% of its total $30.6 million annual gain. According to the order's findings, in 2000 the Fund's net profit from the IPO trading was approximately $7.3 million, approximately 48% of its total $15.1 million annual gain. Finally, because DSA-NY failed to disclose to the investing public material information regarding the IPO trading, including the nature and extent of the trading and the significant effect of the trading on the Fund's performance, the order finds that DSA-NY willfully violated Section 34(b) of the Investment Company Act. (Rels. IA-2055; IC-25727; File No. 3-10885) |
| "In its complaint, the Commission charged Heartland, Nasgovitz, Beste, Bauer, Clark, Conlin, and Della with fraudulently pricing bonds in the Funds...
The Commission also charged that Nasgovitz, Bauer, Winston, Della and Krueger engaged in insider trading in the shares of the Funds when they sold their shares, and/or tipped others to do so, while aware that the Funds had liquidity and pricing problems. In the disclosure area, the Commission charged that Heartland, through Nasgovitz, Beste, Bauer, Clark, Conlin and Winston, misrepresented and omitted material facts in the offer and sale of shares in the Funds. The misrepresentations and omissions related to the risks of investing in the Funds, the credit research on the bonds purchased and held by the Funds, the credit quality of the bonds held in the Funds and the liquidity of the Funds." |
| "Two significant cases from the last couple years illustrate the necessity of supervising specifically for risks associated with an up market. Our action against The Dreyfus Corporation and its portfolio manager, Michael Schonberg, in 2000, and our action against the Van Kampen Investment Advisory Corp. in 1999, involved failures on the part of the respondents to disclose the degree to which the success of certain of their mutual funds was dependent on difficult-to-replicate investments in hot IPOs. Dreyfus involved a portfolio manager of several funds who preferentially allocated investments in hot IPOs to one of the funds he managed. During the fund's first fiscal year, these IPO investments accounted for a whopping 86 percent of the fund's total return. Dreyfus touted its results, and the fund's resulting number one ranking by Lipper in advertisements, without reference to the fund's reliance on hot IPOs to generate its return." |
| "Last fall, the Commission instituted proceedings against Van Kampen Investment Advisory Corp. in connection with its failure to disclose, both in Commission filings and in advertisements, that more than one-half of the Van Kampen Growth Fund's record 61.9% return was attributable to the impact of hot IPOs. The Growth Fund operated as an incubator fund for the first 13 months of its existence, during which it invested in 31 hot IPOs. Because the fund was so small in its early stages, even a handful of shares from each IPO had a dramatic effect on the growth of the fund's assets. When the Growth Fund opened to the public in its second year of operation, Van Kampen promoted the fund by reference to its first-year performance, and the fund's net assets quickly increased from $1.1 million to $110.1 million. It was questionable, to say the least, that the fund could continue to generate such returns through investing in IPOs, given the increase in the fund's assets. Under these circumstances, the failure to inform potential investors of the substantial impact of IPO shares on the Growth Fund's first year performance made Van Kampen's touting of the Fund's first year performance materially misleading." |
| Parnassus is an administrative proceeding in which we
sued two outside directors of the Parnassus Fund. We
alleged that they aided and abetted and caused the Fund to
overstate its net asset value by failing to value in good
faith the Fund's holding in a thinly traded stock. For two
years, the Fund valued the stock at 34 cents per share.
This price was based on the last available Nasdaq market
quote - a quote issued before the company was de-listed
after its equity turned negative and before the company
filed for bankruptcy. Thereafter, the company's shares
traded in the pink sheets at prices as low as one cent per
share. Nonetheless, the Fund continued to value the stock
at 34 cents per share. The Fund also carried a $100,000
promissory note of the same company at an inflated price.
The bloated valuations caused the fund to overstate its NAV, which in turn provided redeeming shareholders a windfall and shortchanged those buying new shares. In addition, the adviser received more than it was entitled to. |