Big Mutual Fund to Face Some Legal Action

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Big Mutual Fund to Face Some Legal Action

By Riva D. Atlas, The New York Times

November 5, 2003

Regulators are considering action against Alliance Capital Management for improper trading of mutual funds that may have been done with the knowledge of top executives, people briefed on the investigation said yesterday.

The Securities and Exchange Commission and Eliot Spitzer, the New York attorney general, are looking at frequent trading in and out of Alliance's funds by a Las Vegas investor and by Edward J. Stern, a hedge fund manager who reached a settlement with Mr. Spitzer in September.

Alliance received a Wells notice from the S.E.C. recently, letting the firm know that the commission staff is prepared to recommend that action be taken against Alliance and giving the firm a chance to refute any accusations. The firm must respond to the notice this week, a person briefed on the inquiry said.

Alliance would be the second mutual fund company to face regulatory action in the widening investigation of trading in the industry. Last week, the S.E.C. and the secretary of the commonwealth of Massachusetts filed a civil suit against Putnam Investments, accusing the firm of failing to prevent improper trading by its portfolio managers. The chief executive of Putnam resigned on Monday, though the company denies any wrongdoing.

Alliance, which managed $438 billion as of the end of September, has said that it is cooperating with regulators.

Regulators are also weighing action against the Security Trust Company of Phoenix, which acts as an intermediary in the trading of mutual funds on behalf of institutions, according to a person briefed on the inquiry.

At least some of the trading under investigation at Alliance was done by a Las Vegas investor named Daniel Calugar, who ran a small brokerage firm called Security Brokerage. At the peak of his trading with Alliance, Mr. Calugar may have traded more than $100 million in and out of Alliance mutual funds in return for $20 million worth of investments in the company's hedge funds, people briefed on the matter said.

Alliance, like other large money management firms, has been trying to expand its hedge fund business, consultants said. Hedge fund managers receive a large share - typically 20 percent - of the fund's profits in any given year. If the hedge fund assets grow, managers stand to make a lot more than they could managing a mutual fund, consultants said.

Alliance began reducing the amounts Mr. Calugar could trade over the course of the last year, until he closed his account a few months ago, one person said.

A recorded message at Security Brokerage's offices indicated that the firm had shut down, but it did not provide a forwarding number. Mr. Calugar did not return a message left for him at a number in Ponte Verda Beach, Fla.

In late September, Alliance suspended two executives for what it described as "conflicts of interest in connection with certain market timing transactions."

While the company did not identify the employees, a person briefed on Alliance's own investigation into fund trading identified the executives as Gerald T. Malone, manager of the Alliance Bernstein Technology Fund, and Charles B. Schaffran, who oversees marketing for Alliance's hedge fund division. Lawyers for the two men declined to comment yesterday.

Another hedge fund marketing executive, Mark Marxer, may have been involved in arranging for Mr. Calugar's trading, people briefed on the arrangement said. Mr. Marxer, who has since left Alliance to join a hedge fund, declined to comment yesterday.

Regulators are still determining who at Alliance was aware of the trading by Mr. Calugar. Both Mr. Schaffran and Mr. Marxer reported to Bruce Calvert, chairman of Alliance, one person briefed on the investigation said.
Regulators are also looking at trading done in and out of Alliance funds by Mr. Stern, manager of a hedge fund, Canary Capital, who reached a $40 million settlement with Mr. Spitzer in early September. A lawyer for Mr. Stern declined to comment last night.

A spokesman for Alliance declined to comment on the potential action; lawyers representing the company did not return calls. Representatives of the attorney general's office and the S.E.C. declined to comment.

Regulators are also considering action against Security Trust, which is believed to have arranged for Mr. Stern to trade in and out of the shares of mutual funds after 4 p.m. but at an earlier price, according to a complaint filed by the attorney general in connection with the settlement with Mr. Stern. A spokeswoman for the company said that its lawyers planned to meet with lawyers in Mr. Spitzer's office tomorrow.