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Compliance January 30, 2008
SEC Smacks Firm with $3.9 Million Fine for Fund Mispricings
The Securities and Exchange Commission (SEC) has fined Heartland Advisors Inc. $3.9 million for mispricing two municipal bond funds.
Reported by Nevin E. Adams
This week the company and its chief executive, William J. Nasgovitz, were fined $3.5 million, while chief operating officer Paul T. Beste and former employees Thomas Conlin and Greg D. Winston were fined $95,000 each. Senior vice president of trading Kevin D. Clark and former employee Kenneth J. Della were ordered to pay $25,000 each. The respondents consented to the SEC order without admitting or denying the Commission’s findings, except as to jurisdiction, which was admitted.
The SEC had alleged that the Milwaukee-based investment firm failed to properly price the value of some bonds in its Short Duration High-Yield Municipal Fund and High-Yield Municipal Bond Fund in 2000 (see SEC Charges Firm Mispriced Two Junk Bond Funds).
At Issue
According to the SEC, the funds’ portfolios included several municipal bonds that were valued by the funds at prices above their fair values. As a result, throughout that time period, the funds’ net asset values were incorrect, the funds’ shares were incorrectly priced, and investors purchased and redeemed fund shares at prices that benefited redeeming investors at the expense of remaining and new investors. On October 13, 2000, Heartland devalued the bonds, thereby resulting in approximately $60 million in monetary losses to shareholders, according to the SEC.
The SEC’s original complaint said that Heartland, through Nasgovitz, Beste, Bauer, Clark, Conlin and Winston misrepresented the funds’ NAVs and, in commission filings and promotional materials, their efforts to manage certain risks associated with investing in the funds. For example, Heartland represented that it was actively managing the funds to minimize share price fluctuation when it was not doing so. The SEC said that Heartland also represented that it performed intensive credit research and limited the percentage of unrated high yield bonds held by funds – when the firm actually conducted inadequate research and the vast majority of bonds held by the funds were unrated and relatively illiquid.