SEC Also Charges Five Former Columbia Executives for Conduct Relating to Market Timing Arrangements
Washington, D.C., 9 February 2005 – LAWFUEL – The Law News Network -The Securities and Exchange Commission today announced the settlement of an enforcement action against Columbia Management Advisors, Inc. (Columbia Advisors), Columbia Funds Distributor, Inc. (Columbia Distributor), and three former Columbia executives in connection with undisclosed market timing arrangements in the Columbia funds. In settling the matter, the Columbia entities will pay $140 million, all of which will be distributed to investors harmed by the conduct. The SEC also brought fraud charges against two additional former Columbia senior executives in federal court in Boston.
In separate orders, the SEC found that Peter Martin, former national sales manager, entered into several undisclosed timing arrangements that were inconsistent with the funds’ prospectus disclosures, and that Erik Gustafson, formerly a Columbia portfolio manager, breached his fiduciary duty to the funds by approving four such arrangements. In addition, the SEC found that Joseph Palombo, formerly the chief operating officer of Columbia Advisors and chairman of the board of several Columbia funds, ignored indications of improper trading and failed to take appropriate action.
In its complaint filed in federal district court today, the SEC alleged that two former employees of Columbia Distributor – co-president James Tambone and senior sales executive Robert Hussey – entered into or approved undisclosed timing arrangements with multiple investors that benefited the executives but were detrimental to long-term fund shareholders.
David P. Bergers, Associate District Administrator of the SEC’s Boston District Office, said, “Columbia Distributor and Columbia Advisors violated a fundamental trust when they placed their own interests ahead of their clients’ interests. This $140 million settlement ensures compensation to injured investors and sends the clear message that such conduct will be firmly punished.”
Columbia Advisor and Columbia Distributor agreed, without admitting or denying the SEC’s findings, to pay $70 million in disgorgement and a civil penalty of $70 million. The entities also consented to orders censuring them, ordering them to cease and desist from future violations and requiring them to undertake certain compliance and mutual fund governance reforms to enhance internal protections for investors.
Without admitting or denying the SEC’s findings, Martin, Gustafson and Palombo agreed to the entry of settled orders requiring them to cease and desist from future violations. The SEC’s order requires Martin to pay $10,000 in disgorgement and a $50,000 penalty and suspends him for twelve months from association with any broker-dealer, investment adviser or investment company. Gustafson will pay a $100,000 penalty and serve a twelve-month suspension from association with any investment adviser or investment company. Palombo will be suspended for six months from association with any investment adviser or investment company, followed by a twelve-month suspension from serving as an officer or director of any investment adviser. The Commission’s order also bars Palombo from serving as a trustee, officer or director of any registered investment company and requires him to pay $100,000.
The SEC’s civil fraud complaint against Tambone and Hussey is pending in federal court.
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 SEC’s enforcement investigation of this matter was conducted in cooperation with the Office of the New York Attorney General.