Janus Settles Fund Trading Complaints for $225 Million

April 27 (Bloomberg) -- Janus Capital Group Inc. agreed to cut fees by $125 million and pay $100 million to settle allegations by New York and Colorado regulators that it allowed favored clients to engage in improper mutual fund trading that hurt other investors.

The Denver-based firm also reached a preliminary accord with the Securities and Exchange Commission that is subject to approval by the federal agency's commissioners, Janus said in a statement.

Janus, the ninth-largest U.S. mutual fund manager, was among the first four firms that New York Attorney General Eliot Spitzer named in September when he disclosed his probe of the $7.6 trillion industry. Since then, investors have withdrawn a net $18.6 billion from Janus and senior company officials including former Chief Executive Officer Mark Whiston have resigned.

``This settlement continues our efforts to level the playing field for mutual fund investors,'' Spitzer said. ``From now on, market timers will no longer be given special access and permitted to profit at the expense of long-term investors.''

Federal and state regulators have now imposed $2.1 billion in penalties on companies accused of trading improprieties. The amounts range from $675 million for Bank of America Corp. to $110 million for Putnam Investments. More than two dozen companies have been made the subject of investigations and Spitzer said in an interview that settlements with other firms are forthcoming.

``Remember, I said this is about fees, fees, fees,'' Spitzer said. ``By forcing boards to pay attention to their fiduciary obligation, we are zeroing in on the way investors have been damaged over the past years.''

Excessive Trading

The settlement announcement was made after the close of U.S. stock markets. Janus shares, which rose 44 cents to $15.99 as of the 4 p.m. close of the New York Stock Exchange, reached as high as $16.30 in after-hours trading.

The company's stock had declined 10 percent since Sept. 3, when Spitzer unveiled his investigation, compared with the 7.6 percent advance of the SIG Investment Managers Index.

The settlement was ``in line with expectations and I think it's a good thing to put behind the company and move on,'' said Franklin Morton, senior vice president with Chicago's Ariel Capital Management Inc. in Chicago. Ariel is Janus's largest shareholder, with about 11 percent of shares outstanding.

Janus permitted excessive trading in its funds, including international and foreign funds, Spitzer and Colorado Attorney General Ken Salazar said in a statement.

Under the agreement with Spitzer, Salazar and the Colorado Division of Securities, Janus will pay $50 million in restitution and disgorgement and $50 million in civil penalties. The company also will lower mutual fund management fees by $125 million over five years. SEC spokesman John Nester declined to comment on the settlement.


Costs from the accord resulted in a first-quarter net loss of $19.3 million, or 8 cents a share, Janus said. It was the company's first loss since the third quarter of 2002. A year earlier, Janus had net income of $38.6 million, or 17 cents.

The expenses included $59 million, or 21 cents a share, for civil penalties, restitution payments and legal charges, the company said. Janus also wrote down $14.2 million, or 4 cents, for intangible assets that included asset withdrawals from some institutional clients, and had $7.6 million, or 2 cents, of personnel-related costs.


``These agreements reflect Janus's commitment to do whatever is necessary to earn investors' confidence,'' Chief Executive Steven Scheid said in the statement. He was named to succeed Whiston last Tuesday.

Investors removed $10.5 billion from Janus accounts in the first quarter, helping to pull the company's total assets under management down by 4.3 percent from the end of last year to $145 billion.

``This is something the mutual fund companies really want to put behind them, so they can get on with their businesses,'' said Robert Heim, a former SEC attorney, now with Meyers & Heim in New York.

The agreements won't resolve any of the civil lawsuits that have been brought against Janus. The suits have been consolidated in federal court in Maryland.

Janus officials have said that the company's relatively low fees made it a poor candidate for rate cuts. Janus's average weighted stock fund expenses are $9.20 per $1,000 invested, sixth- lowest among the 25 largest mutual fund companies, according to data compiled by Bloomberg.

That compares with $15.60 for funds run by Alliance Capital Management Holding LP, the first company to settle with regulators. Alliance agreed in December to cut its fees by $350 million over five years, as well as pay $250 million in penalties.

Diluting Returns

Spitzer in September said Janus permitted investors including the Canary Capital Partners LLC hedge fund to make frequent, short-term trades in its funds, a practice known as market timing. Most companies have discouraged market timing, saying it dilutes returns for buy-and-hold investors and drives up transaction costs.

Janus acknowledged in December that 10 investors were permitted to make short-term trades in seven funds. Four of the accounts were active.

Canary's trades began in November 2001, Spitzer said. Janus said last month that when Whiston headed the company's sales unit, he commissioned a study of market timing at the firm, which was completed in November 2002. Market timing persisted at Janus for at least seven more months.

Executive Departures

Janus returned $314 million to market timers in September and said they had made $22.8 million in profits. Spitzer's revelations forced Janus to set aside reserves of $62.8 million in the fourth quarter, including $31.5 million to repay fund investors hurt by improper trading. Janus said its profit from the arrangements was $1 million.

Besides Whiston, who served as chief executive for 16 months, other Janus executives to depart or take leaves include Richard Garland, the former head of the international sales unit. Garland's e-mails were quoted extensively in Spitzer's complaint against Canary. Executive Vice President Lars Soderberg, head of institutional sales, started a leave of absence in early April.

The company said this quarter it will have costs of $17 million, or 4 cents a share, for payments and benefits associated with Whiston's departure.

Janus shareholders have pulled money out of the funds for 34 consecutive months, first prompted by poor performance in the bear market, then by the fund trading scandal. In that time, only Boston-based Putnam has had more money withdrawn.

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