The Securities and Exchange Commission yesterday announced civil fraud charges against Invesco Funds Group, and Raymond R. Cunningham, IFG’s president and chief executive officer. Invesco Funds Group, Inc., a Denver investment adviser, manages the Invesco complex of mutual funds. According to the charges, IFG and Cunningham fraudulently accepted investments by dozens of market timers in Invesco mutual funds to enhance the management fees earned by IFG. In so doing, Invesco and Cunningham violated the market timing policies reflected in the funds’ prospectus disclosures and breached their fiduciary duties to the funds and their shareholders.
The SEC’s action was brought contemporaneously with a related action by the> Attorney General of the State of New York.
Stephen M. Cutler, Director of the SEC’s Division of Enforcement, said, “IFG and its CEO willingly sacrificed the interests of mutual fund shareholders when market timers dangled the prospect of higher management fees in front of them. By granting special trading privileges to selected customers, they readily violated the fiduciary duty they owed to all shareholders and rendered meaningless the funds’ prospectus disclosures on market timing.”
Randall J. Fons, Regional Director of the SEC’s Central Regional Office in Denver, said, “The sort of activity alleged in this complaint is an egregious and inexcusable violation of the trust that Invesco’s public shareholders put in IFG. In circumstances like this, where a fiduciary puts its own interests before those of the fund shareholders, the individuals and entities responsible for the fraudulent conduct will be held accountable.”
The SEC’s complaint, filed today in the United States District Court for the District of Colorado, alleges the following.
From at least July 2001 until October 2003, IFG and Cunningham fraudulently accepted investments by market timers in Invesco mutual funds to enhance the management fees earned by IFG. Specifically, IFG entered into specific arrangements with particular investors under which these investors were allowed to market time Invesco funds. IFG termed these investors “Special Situations.” These Special Situations were kept secret from the independent members of the funds’ boards and from the funds’ investors. According to the Commission’s complaint, IFG and Cunningham accepted these investments with knowledge that they would be detrimental to long-term shareholders in the mutual funds. In addition, these Special Situations violated the market timing policy disclosed in the prospectuses for the mutual funds. This policy stated that exchanges between funds by investors would be limited to four yearly and that changes in this policy would only be allowed if it was in the best interests of the funds.
Despite this disclosure, IFG did not enforce its market timing policy for shareholders whose accounts were less than approximately $100,000. In addition, IFG allowed a multitude of larger shareholders to market time the Invesco funds. Nevertheless, IFG continued to fraudulently mislead investors by using the prospectuses that contained the false market timing policy.
The complaint further charges that IFG and Cunningham had a fiduciary duty to act at all times in the best interests of the Invesco mutual funds. Accordingly, they had an affirmative obligation to act in the utmost good faith, and to provide full and fair disclosure of all material facts to investors. Despite this duty, IFG and Cunningham never disclosed to shareholders in the funds or the independent directors of the Invesco fund complex that the Special Situations existed or that IFG had a conflict of interest because the Special Situations served to increase its management fees. IFG is charged with violating the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Cunningham is charged with violating or aiding and abetting IFG’s violations of these provisions. IFG and Cunningham are also charged with violating Section 34(b) of the Investment Company Act of 1940 based on the filing of materially false and misleading registration statements with the SEC. The registration statements were allegedly false and misleading because they contained the fund prospectuses described above. Finally, the SEC seeks relief against IFG and Cunningham under Section 36(a) of the Investment Company Act. This provision allows the SEC to seek injunctive relief against any investment adviser to or director of an investment company based on a breach of fiduciary duty involving personal misconduct.
The SEC’s action seeks permanent injunctions against IFG and Cunningham, disgorgement of their ill-gotten gains plus prejudgment interest, and civil penalties.