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S.E.C. Mutual Fund Inquiry Widens to Include Wellington
By Gretchen Morgenson, The New York Times
May 26, 2004
The Wellington Management Company, one of the nation's oldest and most respected money management firms and an adviser to more than a dozen funds offered by the Vanguard Group, is under investigation by officials at the Securities and Exchange Commission.
The investigation suggests that the mutual fund scandal may not only be expanding, but may also be threatening to touch Vanguard, the nation's second-largest fund company and one of the most trusted names in mutual funds.
"We were informed by the S.E.C. that it had initiated an investigation relating to our trading practices and procedures," said Lisa D. Finkel, a spokeswoman for Wellington. "We do not believe it has to do with market timing and late trading."
Ms. Finkel declined to provide additional information, like which of the firm's practices were under scrutiny or whether trading in Vanguard funds was an issue.
A broad examination of Wellington's trading practices would appear to encompass all the firm's clients, including banks, insurance companies, endowments and 95 mutual fund companies. As of March 2004, Wellington managed $416 billion in stock and bond portfolios for approximately 1,000 clients.
Wellington acts as investment adviser to 250 mutual fund portfolios, including 13 Vanguard Funds with $100 billion in assets. Some of the nation's largest funds - Vanguard's Wellington Fund, with $29.6 billion in assets, and the Windsor Fund, with assets of $18.7 billion - are managed by Wellington. The firm also manages funds offered by ING, Hartford Financial Services and the Enterprise group of funds.
Since improprieties among mutual funds were identified in September by Eliot Spitzer, the New York attorney general, the investigations have centered on two types of dubious trading.
Late trading, in which some mutual funds allowed select customers to enter orders for shares after the market closed, enabled those traders to capitalize on significant price changes.
Market timing, the other improper practice, has been more prevalent and involves rapid-fire trading to exploit differences between a fund's share price and the prices of securities in the fund's portfolio. Such trades force fund managers to buy and sell securities, driving up the fund's costs and harming long-term investors.
The S.E.C., as is its custom, declined to comment on its investigation. A Vanguard spokesman said that he was not aware of the Wellington inquiry.
The investigation of Wellington was the subject of discussion when the firm met in recent weeks with one of its public pension clients, the Policeman's Annuity and Benefit Fund of Chicago. Wellington was under consideration to be one of the Chicago fund's bond managers, but the fund's pension consultant advised waiting until the investigation of Wellington was resolved before awarding business to the firm.
Nevertheless, John J. Gallagher Jr., the controller of the policeman's fund, said that his organization had retained Wellington, awaiting the outcome of the investigation.
Edward A. H. Siedle, a former mutual fund executive and Securities and Exchange Commission lawyer who investigates fraud in pensions as president of the Benchmark Companies in Ocean Ridge, Fla., said he had no specific knowledge of the Wellington investigation. But he said he expected investigators would look at personal trading by fund managers, the allocation of hot initial public offerings and other investments to Wellington's various institutional accounts and mutual funds, and the possibility that commissions on securities trades were directed to firms or entities that helped Wellington's marketing efforts.
Founded in 1928, Wellington created the first balanced fund investing in both stock and bonds - called the Wellington Fund - in 1929, the year of the stock market crash. The money management firm, which is based in Boston, also created the first fund to invest in government-sponsored mortgage securities, in 1979.
Although Wellington is a manager to many big funds that have become household names, the firm stays very much behind the scenes. Its managers maintain a low profile and rarely appear in the financial media.
Wellington and Vanguard have had a long association. John C. Bogle, the founder of the Vanguard Group, began his fund management career at Wellington in 1951. He became the firm's chief executive in 1967 but left in a dispute with management in early 1974. Later that year, Mr. Bogle founded Vanguard, which now has $700 billion under management. Only Fidelity Investments is larger, with more than $900 billion in assets.
Vanguard, which took over the Wellington Fund in 1975 but kept Wellington as its manager, has become the nation's second-largest fund company largely on its index funds, which mirror the performance of a basket of stocks or bonds and therefore do not employ managers who pick stocks. The funds run by Wellington, however, are among those offered by Vanguard that are actively managed, with portfolio managers trying to beat the market averages.
Since securities regulators began identifying improper practices at certain fund companies last fall, seven of them, including Putnam Investments, the Janus Capital Group and Strong Capital Management, have settled with regulators and paid fines. More than $1 billion in fines, disgorgement and fee reductions have been wrung from the industry.
Several top fund executives have lost their jobs. These include Lawrence J. Lasser, Putnam's former chief executive, and Richard S. Strong, founder and chief executive of Strong Capital, who last week paid $60 million to settle regulatory allegations that he had personally benefited at fund shareholders' expense by improperly trading his funds' shares.
Vanguard has been a beneficiary of the fund scandal, attracting assets of investors who have moved their money out of fund companies tainted by improper trading. A recent prospectus of the Vanguard Wellington Fund, for example, noted that Vanguard had instituted special policies to counter market timers and would reject orders that would be disruptive to the management of the fund.
"There is still a lot of work to be done to clean up the money management industry," Mr. Siedle said. "It is encouraging to see that cleanup efforts are proceeding well beyond the initial work of Mr. Spitzer."
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