Invesco Allowed `Market Timing' as Managers Protested (Update1)

(Adds date of e-mail in second paragraph.)

Dec. 3 (Bloomberg) -- The Canary Capital Partners LLC hedge

fund withdrew $180 million from the Invesco Dynamics Fund on Feb.

11, a day after making the investment. Money manager Tim Miller

told his bosses to stop accepting money from traders like Canary

because it's costing the fund ``significant performance.''

``This isn't good business for us,'' Miller wrote in an e-

mail dated Feb. 12 to Invesco President Raymond Cunningham,

according to a filing from New York State Attorney General Eliot

Spitzer. ``They need to go.''

The incident was among dozens of Invesco trades that let

Canary earn $50 million while hurting performance and raising

trading costs and taxes for other Invesco shareholders, regulators

said. The trades are the basis for fraud accusations filed

yesterday by Spitzer and the Securities and Exchange Commission

against Invesco, a Denver-based unit of Amvescap Plc.

Cunningham allowed Canary and more than 60 other investors to

make frequent trades for a fee, according to the civil lawsuit

filed by the regulators. That's far more ``market-timing'' than

has been uncovered in prior cases, they said. Yesterday, Richard

Strong, who allegedly made $600,000 in profits from frequent

trades of his company's mutual funds, quit as chairman, chief

executive and chief investment officer of Strong Capital

Management Inc.

Amvescap, based in London, denies any wrongdoing at Invesco

and says controlling such traders is a ``very complicated'' issue

for the industry, according to the company's statement released

yesterday.

`Boggles My Mind'

``I can't imagine a situation where allowing market timing

would be good for anybody,'' said David Marder, a former SEC

attorney who now works at the law firm Robins, Kaplan, Miller &

Ciresi in Boston. ``It boggles my mind.''

In September, Canary and its managing partner Edward Stern

settled a complaint from Spitzer by agreeing to pay $40 million

and cooperate in the attorney general's ongoing investigation.

Invesco's cross-town rival Janus Capital Management Inc. has

said it had 12 agreements allowing frequent trading, all now

terminated -- including one with Canary, according to Spitzer.

Federated Investors Inc. in Pittsburgh said it had ``a few

agreements,'' including one with Canary of Secaucus, New Jersey.

Spitzer, the SEC and Massachusetts regulators have already

sued four firms for civil wrongdoing and filed criminal charges

against six former traders and executives.

More than 50 people have lost their jobs because of the

probe, including Putnam Investment's former chief executive Larry

Lasser, whose firm was the first fund company to face civil

accusations after allowing frequent trading that wasn't disclosed.

Manager Complaints

Miller and other Invesco fund managers complained that the

frequent trades, which generated profit at the expense of long-

term shareholders, were hurting performance, according to internal

memos and e-mails included in Spitzer's complaint. Miller didn't

return a message left at his office in Denver.

In June 2002, an unidentified employee sent an e-mail to

Cunningham complaining that frequent trades in the Dynamics fund

totaled as much as 5 percent of the fund's assets on June 19,

disrupting the fund's investment strategy, forcing it to buy and

sell stocks solely to deal with the flows.

The fund lost 33 percent in 2002, worse than 91 percent of

similarly managed funds, according to data compiled by Bloomberg.

During the past three years, the fund has lost an average of 14

percent a year, lagging 89 percent of its peers.

``There's no question that they understood how detrimental

this was,'' said Randall Fons, director of the SEC's Denver

office, in a telephone interview, citing ``an alarming amount of

internal documentation.''

`Timer-Friendly'

James Lummanick, Invesco's chief compliance officer, told

Cunningham that the firm had become known as a ``timer-friendly

complex'' in a Jan. 15 memo that listed 11 ways frequent trading

hurt the firm or shareholders in its $20 billion of funds.

As much as $1 billion of Invesco's assets were being

frequently traded chopping as much as 1 percent a year off of fund

total returns, Lummanick wrote, according to regulators. The

company should either cut off the trading or ``probably'' amend

its prospectuses, he concluded.

Cunningham, who approved the agreement with Canary, thanked

Stern for his business over dinner in late 2002 or early 2003, the

SEC's complaint said.

After Miller's February e-mail, even Cunningham said the

situation had gotten out of hand. ``We are constantly trying to

balance revenue growth with an accommodation for this type of

business,'' Cunningham wrote in a reply to Miller, according to

regulators. ``I am certain that we have reach(ed) a point where

either our communication with them has broken down or they have

chosen to ignore the original parameters we discussed.''

Canary kept making trades until it withdrew all its money

when Spitzer subpoenaed the firm in July, according to regulators.

--Aaron Pressman in the Boston newsroom (617) 338-5822 or

apressman@Bloomberg.net, with reporting by Otis Bilodeau in

Washington and Philip Boroff in New York. Editors: McCabe,

Quinson.