Compliance January 14, 2007

Ex-UBS and Merrill Advisers Investigated by NYSE for Market Timing

The New York Stock Exchange appears to be investigating three advisers, known as the CBS Group, who were involved in market timing five years ago, fining their supervisors at both UBS and Merrill, according to published reports.
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In its monthly listing of disciplinary actions released last week, the New York Stock Exchange said it fined John Borgese, a former UBS AG branch manager, $50,000 who did not properly supervise three unnamed financial advisers who were involved in market timing five years ago when they worked at UBS in Paramus, New Jersey, according to an AP report. Further, the document said action was being taken against the advisers mentioned.

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The advisers, named as Christopher Chung, Kevin Brunnock, and William Savino, in published reports, were reportedly fired from Merrill Lynch in 2003, after joining the firm in January 2002, for allegedly helping a hedge fund trade improperly in mutual funds.

In 2006, the New York Stock Exchange charged the advisers’ supervisor at Merrill Lynch, Curtis Brown, for failing to properly supervise the advisers and maintain controls. He had already been fined, along with his manager Andy Williams, a combined $250,000 after the CBS group had been fired from Merrill, Dow Jones reported.

The three advisers’ licenses were revoked in 2005 by the New Jersey Bureau of Securities for allegedly engaging in market timing. The New Jersey Bureau of Securities and the New York Stock Exchange also fined UBS $49.5 million fine for not preventing the improper trading of the advisers. Merrill Lynch was fined $13.5 million by the New York Stock Exchange in 2005 for the same reason.

Compliance January 14, 2007

FL Pension Plan Accuses ING of Revenue Sharing Fraud

A Florida pension plan has sued ING Group in federal court claiming that the financial services firm charged the plan higher fees to cover revenue-sharing payments.
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According to Bloomberg, the retirement plan set up for the employees of the Orange County (Florida) Sheriff’s Office claims that ING falsely characterized the payments as reimbursement for services provided to the mutual funds.

The plan not only wants to recover the revenue sharing payments and end the practice, but also wants the case to have class action status, which would allow the plan to sue ING on behalf of all similar deferred compensation plans nationwide that bought group annuity contracts from ING’s Hartford-based life insurance and annuity unit.

“The revenue sharing payments are calculated as a percentage of plan participants’ assets invested in the mutual funds through ING,” the plan said in its complaint, according to Bloomberg. “Those amounts bear no relationship whatsoever to the cost of providing the services or a reasonable fair market value for the services.”

The claim by the Orange County Sheriff’s Office is its second in recent months against a provider. The office sued in November 2006 its former provider Nationwide Life Insurance Co. in the US District Court in Columbus, Ohio, charging that the firm would offer mutual funds to deputies and other investors only if the family of funds also paid the company a fee (See FL Sheriff Sues Nationwide Over Fees).

The Dutch bank had also been the target of an investigation by former New York Attorney General Eliot Spitzer over its fee structure. Spitzer alleged ING took fees in exchange for promoting particular funds in retirement plans and failed to disclose those fees. ING agreed to a $33 million settlement in October.

A racetrack in Illinois recently sued Principal Financial Group over its revenue-sharing practices, alleging that the firm breached its fiduciary duties in its arrangements with the mutual funds whose offerings are included in Principal’s 401(k) product (See Plan Sponsor Sues Principal over 401(k) Fund Revenue Sharing).

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