Market timing scandal

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Market timing scandal

Postby Norbert Schlenker » 18 Mar 2005 15:16

The OSC's final report is here. Very readable.
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Postby Bylo Selhi » 18 Mar 2005 16:23

How about a simple apology, guys?
Where are the apologies? That's what I'd like to know. Don't investors deserve something more than excuses from the five fund managers that allowed market-timing activities to take place? Yes, these managers have agreed to pay $205.6 million to unit holders affected by the practice. But that's not the same as saying they're sorry. Apologies help victims come to terms with those who have injured them. They indicate important lessons have been learned and that similar wrongdoing won't happen again.
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Postby DanH » 18 Mar 2005 16:42

You know that there's a very good reason that no apology has been made by anybody. It's called the fear of class actions. I'm certain that there are fund company executives that are sorry about what happended. But they'd be hurting their shareholders by making a public apology. Plus, their lawyers would jump up and down screaming.
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Postby yielder » 18 Mar 2005 16:55

The chief executive of Manulife Financial Corp. issued an apology Thursday as he promised clients who were steered into funds run by Portus Alternative Asset Management Inc. that they will get their money back.

Dominic D'Alessandro made the pledge to clients of subsidiary Manulife Securities International Ltd. who were referred by financial advisers to Portus, a hedge-fund operator currently under investigation by several regulatory authorities.

"Whatever the outcome of the investigation, Manulife Financial guarantees that you will recover 100 per cent of the principal amount you invested with Portus," D'Alessandro wrote in a letter released Thursday.

"We will, in effect, 'stand in your shoes' and aggressively pursue all avenues to secure and recover invested funds."


Source

As a long term shareholder of MFC, I'm pleased that the company will eat as much as $250 mil; I can live with the short term earnings hit. Might even get an opportunity to buy more at a bargain price if the market has it's "normal" short term reaction to a bad earnings report.

Their action tells me more about the quality of management than any conference call or report ever will. It basically says that they believe that it's good business to put the client first and act to that belief.

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Postby DanH » 18 Mar 2005 17:09

Mike, MFC does deserve some credit for this move, but it's pretty low risk relative to their other options.

They could do nothing and be the subject of a class action lawsuit + regulatory consequences. And we know from the mutual fund scandal that the OSC looks favourably upon companies doing something to protect investors.

They're also in the position of being able to sue another party - i.e. Portus. Plus, they've not been "referred to Enforcement" to strike a settlement agreement.

My point: Fund companies have already been targetted and dealt with by regulators - and agree to settlements that were something like 30-40x the amount they benefitted from the market timing. Did they breach their duty to unitholders? Yup. Have they paid a steep price? Yup.

For them to offer an apology now would be silly from a corporate standpoint. Sure, they'll score some brownie points from the 'ringers, me, media but it won't make a dent in their net sales/redemptions. Just as the scandal hasn't impacted net sales so far. So, while analysts and unitholders would appreciate an apology; I, as a shareholder of one of the affected companies, don't want to hear any utterance of an apology ;-)
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Postby Bylo Selhi » 18 Mar 2005 17:11

DanH wrote:You know that there's a very good reason that no apology has been made by anybody. It's called the fear of class actions. I'm certain that there are fund company executives that are sorry about what happended. But they'd be hurting their shareholders by making a public apology. Plus, their lawyers would jump up and down screaming.
That's the spineless way out.

If these executives don't believe their fund companies did anything "wrong" then what are they afraid of?

If they truly believed that what they did violated their fiduciary duty to their unitholders, they'd fess up, aplogize and offer to pay the long-term unitholders who were affected by market-timing a fair compensation for their losses.

They can't have it both ways as they appear to be trying and still expect to maintain the trust and confidence in the suckers, er, unitholders who pay their salaries and bonuses.
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Postby yielder » 18 Mar 2005 17:37

but it's pretty low risk relative to their other options.


Maybe, maybe not. They agreed to eat $250 mil without a fight. Maybe that's a tactic and nothing else. Maybe D'Alessandro's a fantastic spin doctor with the ethics of a Bernie Ebbers. Who knows? I can crunch numbers forever and not know much about management. I take what management says at face value until they give me cause to believe otherwise.

As for suing Portus, the return on invested time and money will probably be zip. If they can figure a way of getting at Société Générale, that might be worth the effort.

For them to offer an apology now would be silly from a corporate standpoint.


Ahh, you're more cynical that I am, Dan Hallett. :)

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Postby DanH » 18 Mar 2005 17:56

Bylo Selhi wrote:
DanH wrote:You know that there's a very good reason that no apology has been made by anybody. It's called the fear of class actions. I'm certain that there are fund company executives that are sorry about what happended. But they'd be hurting their shareholders by making a public apology. Plus, their lawyers would jump up and down screaming.
That's the spineless way out.

If these executives don't believe their fund companies did anything "wrong" then what are they afraid of?


Remember? Lawsuits. When I was in school, I took a course on insurance law. The prof, a lawyer, told us that (at that time) admitting fault in a car accident was in breach of virtually all auto insurance contracts - whether you were at fault or not. There were significant legal implications to doing so.

Same here.

Bylo Selhi wrote:If they truly believed that what they did violated their fiduciary duty to their unitholders, they'd fess up, aplogize and offer to pay the long-term unitholders who were affected by market-timing a fair compensation for their losses.


After reading the OSC's report yesterday, it's clear that the settlement amounts may or may not be close to actual losses sustained at the hands of market timers. The report says of its methodology that they used a "theoretical quantification" model to calculate losses, which were the basis of the settlements.

Now, that's fancy wording for formula or estimate. Some have suggested to me privately that the formula significantly overstated the losses. Perhaps it does in some cases and understates it in others. I don't know. But that's the point. We don't really know what the losses were and the OSC is not giving us a clue as to the accuracy of their "theoretical quantification".

Not trying to skirt the issue but until we know what the losses are, how can anyone be sure whether the settlement amounts are full compensation or not? We can't. Only the fund companies and the OSC know for sure.

And why wouldn't a fund company come out with some details? It could be that they don't want to raise any red flags at the OSC. And, believe me, that happens. Why draw more regulatory attention to oneself?

Which leads me to mike's comment...

Yielder wrote:Ahh, you're more cynical that I am, Dan Hallett. :)


Guilty as charged ;)

Yielder wrote:As for suing Portus, the return on invested time and money will probably be zip. If they can figure a way of getting at Société Générale, that might be worth the effort.


I don't think so. They've scored some PR points and will probably not be out of pocket much financially. Worst case is $240M. The OSC has so far indicated that the vast majority of Portus assets are intact, though KPMG can't seem to confirm the same. However, if they did nothing, there's a chance they'd not only get smeered in the media but also suffered greater financial losses.
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Postby Bylo Selhi » 30 Mar 2005 15:47

The hidden cost of fighting back
Pressure exerted to settle before court action

Vern Krishna, Financial Post, Wednesday, March 30, 2005

If you are guilty of securities violations, do you want to pay the regulatory authorities with cheap pre-tax or expensive after-tax dollars? New tax rules give you a choice and provide powerful incentive to settle rather than fight securities prosecutions. It is no wonder the Ontario Securities Commission is improving its settlement record -- for example, settlements with four mutual funds and three banks implicated in market timing.

It is always difficult to fight with the person who writes the rules, particularly when the rule-writer is government. The latest changes to the tax rules, however, make it even more difficult and expensive for Canadian business to fight against regulatory bodies that can impose fines and penalties.

Generally, the Canadian tax system taxes all income, regardless of its moral taints, and allows taxpayers to deduct expenses that they incur to earned income. The law does not distinguish between legal and illegal income. For example, we tax income from prostitution, drug dealing, insider trading and bribery. Thus, tax law should be neutral and focus on the accurate measurement of income.

Until recently, taxpayers could deduct fines and penalties that they incurred in the conduct of their businesses if the underlying offence was not of an egregious nature. A parking ticket or a fine for an overweight truck was deductible if incurred in the normal course of business. Although the debate on the deductibility of fines and penalties has always been burdened with moral overtones, the Supreme Court of Canada upheld the principle that tax law should generally be neutral. Environmentalists, however, were enraged because the deduction of fines for environmental infractions reduced the overall economic wallop of the fine.

The latest budget amendments overturn the decision of the Supreme Court of Canada and, in the process, affect litigation strategy. Fines imposed by government agencies, regulators, courts, tribunals or statutory bodies with authority to levy penalties -- whether domestic or foreign -- are no longer deductible for tax purposes. Thus, the new rules require businesses to pay fines with after-tax dollars, which virtually doubles their cost. Proceeds of crime forfeited to the state, however, are still deductible as business expenses.

The theory underlying the new rules is that the deduction of a fine or penalty has the effect of blunting the magnitude of the financial sanction against the transgressor. But the prohibition also has other important implications for civil and criminal counsel. For example, where a Securities Commission, whether domestic or foreign, brings an action against a company for alleged violations of securities law, the company will have to consider whether it should settle the action without prejudice and admission of liability or defend itself in litigation.

If it settles, it will probably be able to deduct the amount of the settlement in computing its income for tax purposes. If it does not settle the action and loses, it will have to pay any resulting fine or penalty with after-tax dollars. A fine of $1-million that a business pays out of after-tax dollars, for example, translates into a cost of approximately $1.5-million. Thus, domestic and foreign regulators can use the threat of non-deductibility of fines as an extra-judicial weapon to pressure settlements from Canadian businesses. The prohibition also puts into doubt the deductibility of legal fees to the extent that the fees apply to arguments on the amount of the fine or penalty in each case.

Citizens who fight government are always at a disadvantage because governments are rarely sensitive to the costs of litigation financed by the public purse. The financial sanctions of having to pay fines out of after-tax dollars, however, means individuals and corporations must now assess the additional risk of fighting big government against the incremental cost of losing. The new rules have the potential for coercing unwarranted settlements. © National Post 2005
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Postby Bylo Selhi » 01 Apr 2005 16:55

Now the IDA comes out brandishing their big stick. Take that BMO, RY and TD. Ouch! Ouch! (This works out to what, maybe $10 per investor?)

Canadian investors to get payout after fund probe
TORONTO, April 1 (Reuters) - Fines of C$7.2 million ($5.9 million) collected during a recent crackdown on mutual fund trading practices will be distributed to investors affected by the abuses, Canada's Investment Dealers Association said on Friday.

The IDA, the self-regulatory body of Canada's brokerage industry, said the money is part of the C$41.3 million extracted from three bank-owned brokerages for failing to prevent instances of market timing in 2002 and 2003.

It said the money will be distributed to mutual fund companies whose funds were affected by the brokerages' conduct. The IDA expects the fund companies to then pay out the money to investors hurt by the trading abuses.

"The IDA expects mutual fund managers to administer these settlement funds to benefit unitholders in a manner consistent with their fiduciary duties," IDA vice-president Paul Bourque said in a release.

The IDA's crackdown ran alongside a larger investigation of Canada's mutual fund industry by the Ontario Securities Commission, Canada's most powerful regulator.

The OSC eventually settled with five of Canada's largest fund companies, forcing them to pay back a total of more than C$200 million to investors who were affected by trading abuses.

Market timing involves the rapid buying and selling of mutual funds to take advantage of fund prices that are slow to reflect the changing value of individual stocks. It is usually carried out by market professionals, and causes long-term retail investors to lose out on potential gains.

The crackdown focused on the fund companies and brokerages that allowed the practice to take place.

The IDA said the C$7.2 million payout -- part of the settlement with dealers owned by Royal Bank of Canada (RY.TO: Quote, Profile, Research) , Bank of Montreal (BMO.TO: Quote, Profile, Research) and Toronto-Dominion Bank (TD.TO: Quote, Profile, Research) -- represents "trailer fees", which are paid by fund managers to the brokers that sell their funds.


Anyone understand what represents "trailer fees" means in this context?

(Or is this just Joe Oliver's idea of an April Fool's joke?)
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Postby Bylo Selhi » 17 Jun 2009 10:32

Investor loses appeal over `tax-free windfall'
James Daw wrote:Waterloo investor Russell Lavoie has lost a tax appeal over $313 in restitution paid by two mutual fund companies.

Lavoie was paid part of the $205.6 million in compensation the Ontario Securities Commission negotiated with fund managers after finding in 2004 they had allowed short-term traders' profit to create losses for long-term investors.

Justice E.A. Bowie of the Tax Court of Canada rejected Lavoie's claim the payment was a tax-free windfall, ruling it was the equivalent of a withdrawal from his registered retirement savings plans.

"When the appellant (Lavoie) cashed the cheques and applied the funds to purposes other than restoring the value of the fund holdings in his RRSPs then those amounts fell to be treated as amounts received by him in the year as benefits out of or under his RRSPs, and so were taxable in his hands," Bowie ruled.

I wonder what Lavoie will pay in legal fees for this ruling? :roll:
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Re: Market timing scandal

Postby DanH » 10 Dec 2009 22:55

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