Overland Park-based Waddell & Reed Inc. is paying more than $50 million in fines and cutting fees by $25 million to settle charges of market-timing abuses in a family of mutual funds.
Waddell & Reed and two subsidiaries agreed to settle the charges that it had allowed three clients to time the market on its funds, particularly an International Growth Fund that had been marketed to the public as a long-term investment.
Waddell & Reed collected $3.6 million in fees from the market timers, whose actions - rapidly buying undervalued shares and selling overvalued ones - essentially served to "skim profits from long-term investors," said Chris Biggs, Kansas securities commissioner. Regulators accused Waddell & Reed of not properly disclosing the market-timing activities to shareholders.
The settlement, announced Monday, requires Waddell & Reed to:
l Pay $50 million to the Securities and Exchange Commission. The money will be used to compensate investors affected by the market-timing from 1998 to 2003.
l Cut fees on Waddell & Reed Advisors Funds and W&R Target Funds by $25 million, or $5 million a year for each of the next five years, as stipulated through an agreement with the office of New York Atty. Gen. Eliot Spitzer.
l Pay $2 million to Biggs' office, which will use the money to educate the public about securities fraud.
Waddell & Reed "neither admits nor denies" any findings or allegations from regulators, the company said, in a statement. An independent consultant will contact affected investors and devise a restitution plan.
Gail Bright, associate general counsel in Biggs' office, opened the case in 2003 when, as an examiner, she started looking into Waddell & Reed's activities. She soon realized that the case would pay off.
The $2 million fine is the largest imposed by the Kansas securities commissioner.
"Now I have a lot of documents and paperwork to file away," Bright said.