Mutual funds' ties to so-called expert networks under investigation as part of an federal insider-trading probe could undermine efforts by the industry to stem three years of client withdrawals from stock funds.
Janus Capital Group and Wellington Management were among firms that received requests for information last week as part of an insider trading investigation involving hedge funds as well as mutual funds. None of the companies have been accused of wrongdoing.
The probe hits firms as they try to reverse $90 billion in withdrawals from U.S. stock funds since the beginning of 2009. Damage from the industry's last run-in with regulators, a series of trading scandals in 2003 and 2004, took years to repair and led to more than $3 billion in fines against more than two dozen firms, including Bank of America Corp., Putnam Investments, Janus and MFS.
Both MFS and Wellington were clients of Broadband Research, a company that provides research to money managers and whose founder, John Kinnucan, was visited by federal officials as part of the probe. Affiliated Managers Group's Friess Associates and the Columbia Management unit now owned by Ameriprise have also been clients of the researcher, Mr. Kinnucan said in an interview. None of them have been accused of wrongdoing.
This month, industry experts took the spotlight when prosecutors charged a French doctor with tipping off a portfolio manager at FrontPoint Partners on the results of trials for the hepatitis-C drug Albuferon. FrontPoint got withdrawal requests from investors of about $3 billion for the end of the year following the disclosure, and liquidated its $1.5 billion health-care funds.
Don Ching Trang Chu, an employee of an expert network called Primary Global Research, was arrested on Nov. 24 for allegedly providing insider information to hedge funds. Mr. Chu had a roster of Asia-based employees of North American technology companies to feed information to clients, according to court documents. James DeVita, an attorney for Mr. Chu, declined to comment.
Mr. Kinnucan, who provides research about technology companies to hedge funds and mutual funds looking for an edge in the stock market, said he was visited Oct. 25 by FBI agents who questioned him about his research. He said agents threatened to arrest him and asked him to wear a wire to record a conversation with a money manager, whom he declined to name.
All of his clients have left him since he told them about the FBI's visit in an e-mail, he said.
Mutual funds were unscathed by the probes until last week, when Janus and Wellington were among a number of asset managers to receive information requests. Hedge funds Level Global Investors, Diamondback Capital Management and Loch Capital Management had their offices raided by U.S. officials. Hedge fund Balyasny Asset Management said in a Nov. 24 letter to investors that they received a faxed subpoena from the government “requesting a broad set of general information for the last few years.” None of the firms have been accused of wrongdoing.
The mutual fund companies that were contacted by federal prosecutors declined to comment when called by Bloomberg News on whether they use expert networks and what information they were asked to provide.
Janus said on Nov. 23 that it received a request for “general information and intends to cooperate fully with that inquiry.” The firm, in an SEC filing, said it would not provide further updates unless required by law. Janus manages $160.8 billion in assets.
Wellington's offices were not visited by FBI agents, a person familiar with the matter said. On an internal call on Nov. 22, Wellington said that it's conducting a review of records, and that it didn't engage in illegal trading, according to another person, who asked not to be named because the firm is private.
“The document request is general and broad in scope,” Wellington told clients in a Nov. 23 letter to clients. Wellington didn't provide details on what documents were asked for or which government agency asked for them.
Wellington, which manages about $598 billion in mutual funds and in accounts for institutional investors, runs about $175 billion in 19 funds for Vanguard Group. Vanguard, the largest U.S. manager of stock and bond funds, remains “fully confident in and committed” to the relationship with Wellington, according to an e-mailed statement.
A spokeswoman for Wellington declined to comment.
John Reilly, a spokesman for MFS, said in an interview on Friday that company had not received any requests for information from investigators. MFS, which managed $190 billion as of Aug. 31, is a unit of Sun Life Financial and created the first U.S. mutual fund in the 1920s.
Friess Associates manages the Brandywine funds, including the $2.2 billion Brandywine Blue Fund. AMG, which owns stakes in two dozen money managers, owns 70% of Friess. Laura O'Brien, an AMG spokeswoman, declined to comment.
Ben Pratt, a spokesman for Ameriprise, didn't return a call seeking comment. Ameriprise in April completed its $1 billion acquisition of Columbia's stock and bond funds from Bank of America, to create a fund manager with more than $500 billion in assets.
The mutual-fund companies at the center of the trading abuses seven years ago were accused of allowing certain investors, including hedge funds, to make rapid and after-hours trades at the expense of ordinary shareholders. The charges were brought by the SEC, then New York Attorney General Eliot Spitzer and state regulators.
Putnam struggled with investor redemptions that continued for the next five years, before the financial crisis brought about another round of withdrawals. Assets at Putnam are at about $118 billion, down from $272 billion before the probes were announced in 2003. Janus, which had about $147 billion in assets before the trading scandal, had at least $40 billion withdrawals in the two years after settling allegations of trading abuses.
Mutual funds are facing a similar situation now, after investors fled stock funds following a 37% decline in the S&P 500 index in 2008. The U.S. mutual-fund industry had $11.3 trillion in assets as of Sept. 30, according to the website of the Investment Company Institute, a Washington-based trade group.
Some mutual funds may be less affected by moves in a single stock because unlike hedge funds, most mutual funds don't use leverage or hold concentrated portfolios, Geoff Bobroff, a money manager consultant, said in an interview.