Affiliated mutual-fund companies Invesco Funds Group Inc. and Houston-based AIM Investments reached a tentative $450 million settlement with federal and state regulators of allegations that they allowed favored investors to trade rapidly in their funds at the expense of long-term shareholders. The firms are both units of Amvescap PLC of London.
Under the deal, Invesco and AIM agreed to pay a combined $375 million in penalties and restitution to settle with the Securities and Exchange Commission and New York Attorney General Eliot Spitzer. They also agreed to reduce mutual-fund fees charged to investors by $75 million over the next five years. In a separate deal with Colorado regulators, Invesco will pay an additional $1.5 million to cover attorneys fees and “investor education,” whateever that means. As usual in such settlements, neither firm admitted the civil fraud charges.
The Invesco-AIM settlement is one of the largest in the fund-trading scandal that has descended upon the huge mutual-fund industry over the past year. Only Bank of America Corp. agreed to pay more in fines and restitution, though Alliance Capital Management Holding LP agreed to a larger settlement if reduced fees are included in the settlement calculation.
The settlement pact also marks the first time regulators have linked AIM Investments to allegations of improper trading. The Houston firm was not charged late last year when regulators sued Denver-based Invesco and its former chief executive. But during the investigation, regulators discovered that AIM had at least 10 arrangements with select investors that allowed them to trade AIM funds rapidly (or “on market time,” as they say in the industry). Invesco and AIM, which merged to form Amvescap in 1997, merged their operations last year.
Market-timing isn’t illegal, but Invesco and other funds said in their prospectuses that they limited investors’ transactions. Market timing is designed to take advantage of discrepancies between a fund’s share price and the value of its underlying securities. The practice can raise expenses and reduce the profits of long-term fund investors.
Invesco’s tech-stock-heavy funds did well in the bustling 1990s, but fell hard during the resulting bear market. Investors in the Invesco and AIM funds have withdraw more money than they invested in each of the past three years. Through the first seven months of this year, net redemptions from the firms’ stock and bond funds totaled more than $8.3 billion.