Federated to Settle Charges

Federated Investors Inc., one of the nation’s largest investment managers, has agreed to pay $100 million to settle state and federal charges that it allowed favored clients to benefit from mutual fund trades at the expense of other investors, New York Atty. Gen. Eliot Spitzer and U.S. regulators said Monday.

“With this agreement, virtually the entire mutual fund industry has now sworn off improper trading practices and agreed to compensate investors who were harmed,” Spitzer said of the settlements with his office and the Securities and Exchange Commission.

Federated’s president and chief executive, J. Christopher Donahue, said in a statement that the settlements “reflect our focus on strengthening the trust and confidence of investors and our dedication to safeguarding the investments of our clients.”

Federated is the 14th firm to settle improper mutual fund trading charges since Spitzer’s case against Canary Capital Partners in 2003.

Federated has agreed to make reforms, to be censured and to pay $35 million in restitution to investors, $45 million in civil penalties, and cut its management fees by $20 million over five years. Federated also will hire a senior officer to monitor the setting of advisory fees for managing funds to be sure they are “at arm’s length and are reasonable,” according to Spitzer and the SEC.

The investigation of Federated focused on mutual fund timing by insiders that can hurt long-term mutual fund shareholders by reducing their shares’ value.

Spitzer and the SEC accused Federated of secret market timing with three trading groups, knowing it gave an unfair advantage to the groups over individual investors. The regulators also said Federated placed orders from a hedge fund after the 4 p.m. close of the markets. Law requires the mutual fund orders to be placed before the closing to receive that day’s price.

Founded in 1955, Pittsburgh-based Federated manages more than $207 billion in assets.