Washington, D.C., Nov. 4, 2004 – 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.
Helane Morrison, District Administrator of the Commission’s San Francisco District Office stated, “By permitting select customers to engage in market timing and late trading, Fremont ignored its responsibility to treat all fund shareholders fairly and honestly.” Added Marc Fagel, Assistant District Administrator, “This is a disturbing indicator that the abuses we have seen in the industry extended even to smaller, regional firms.”
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.
Fremont was charged with, among other things, violations of the antifraud provisions of the Investment Advisers Act of 1940. Without admitting or denying the findings, Fremont has agreed to settle the charges for $4.146 million, including disgorgement of $2.146 million and a civil penalty of $2 million. The Commission anticipates distributing the recovered money to investors of the mutual funds affected by the market timing. Fremont has further agreed to undertake certain remedial actions and to cease and desist from similar violations in the future.
Nancy Tengler, also of the San Francisco area, was charged for her role in authorizing one of the improper market timing agreements. Without admitting or denying the Commission’s findings, Tengler has agreed to pay disgorgement of $27,000 and a civil penalty of $100,000, and has consented to an order suspending her from associating with an investment adviser or investment company for six months.
Finally, the Commission instituted litigated administrative and cease-and-desist proceedings against former Vice President of Institutional Sales Larry Adams, alleging that he negotiated an improper market timing agreement on behalf of Fremont and charging him with aiding and abetting and causing Fremont’s violations of the Investment Advisers Act.
The SEC’s action was brought contemporaneously with a related action by the Attorney General of the State of New York.