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Fund firms, OSC in talks for group deal

Settlement to resolve allegations of market timing would include investor restitution

Four mutual fund companies targeted for potential enforcement action over alleged market-timing violations are in talks with securities regulators aimed at a group settlement that would include restitution to investors.

The Ontario Securities Commission's enforcement arm is in talks with the four firms and an accord is expected by the end of next month.

The settlement with all four companies -- Investors Group Inc., CI Fund Management Inc., AGF Management Ltd. and AIC Ltd. -- would then be used as a template for a similar accord with any other fund companies that could be swept up in the OSC's investigation, the sources said.

"All I can say is we're in fruitful discussions and these discussions are obviously continuing," OSC spokeswoman Wendy Dey said yesterday.

Previously, the commission has said it hopes to resolve the matter as expeditiously as possible.

Officials at the companies declined to comment.

"Discussions are ongoing but I cannot characterize what those discussions are about," said Investors Group spokesman Ron Arnst.

One industry official involved in the discussions said the sudden departure last week of OSC senior litigator Jay Naster, the lead counsel on the matter, has made the talks "mighty strange. Someone is missing from the table."

Ms. Dey confirmed that Mr. Naster and the OSC have "parted company" but said the regulator has a large team of lawyers working on the mutual fund probe.

Separately, six of Canada's largest mutual fund companies were hit this week with a class-action lawsuit over allegations that they breached their fiduciary duty to act in the best interests of all their investors by allowing market timers to zip in and out of their funds.

The lawsuit, filed in a Quebec court, names the four companies targeted by the OSC as well as CIBC Securities Inc. and Franklin Templeton Investments Corp.

Normand Painchaud, a lawyer at Montreal law firm Sylvestre Charbonerau Fafard, said the trading benefited a few privileged clients at the expense of long-term investors. "The [alleged] inappropriate transactions had the effect of reducing the return on investment for ordinary investors," Mr. Painchaud said in a statement.

Mr. Arnst of Investors Group said the company has received the lawsuit, but cannot comment on any matter before the courts. Officials at other companies, including CI, AGF and CIBC, said they have not yet seen the suit.

The suit, believed to be the first in Canada over allegations of market timing, seeks to represent all Canadian investors in the funds with the exception of those of Ontario. (A Quebec government fund partly finances class actions so long as Quebeckers represent half of the group. By excluding Ontario, the law firm can reach that target.)

Sources familiar with the talks said yesterday that the lawsuit will make it easier for the OSC to secure settlement agreements with the fund companies.

"Everyone would rather negotiate with what you would consider to be a more impartial process than the circus that surrounds a class action," one source said.

Last month, the OSC said Investors Group, CI, AGF and AIC could face enforcement action but did not level specific allegations of wrongdoing against them. The regulator initially gave the companies 10 days to explain alleged abusive trading violations in their funds, but then waived that requirement once the talks got under way.

Market timing involves the rapid, in-and-out trading in a fund by hedge funds and other market professionals who generally take advantage of time-zone differences in international funds, where events, after overseas markets close, often make stock prices out of date.

A Report on Business investigation published in June found that rapid, in-and-out trading in mutual funds totalled more than $220-billion between 2000 and 2003. The investigation found 16 fund companies with telltale signs of market timing in their international funds.

The four companies targeted by the OSC had more funds than any other companies on the list. CIBC and Franklin Templeton also had funds on the list.

The OSC has said up to another 20 companies could be involved in the investigation. The regulator began probing Canadian fund companies last November, two months after a broad crackdown in the United States into market timing and other trading violations.

While market timing is not illegal, a fund manager who allows it can breach his fiduciary duty to act in the best interests of all investors. That is because the market timers can hurt a fund's long-term investors by siphoning off returns.

Investor advocates have said that any fund manager who allowed market pros to scoop up quick profits by zipping in and out of their funds should compensate long-term unitholders for their losses.

The lawsuit alleges that the mutual fund companies shirked their fiduciary obligations by knowingly allowing certain investors to take part of the returns owed to fund investors through targeted and short-term transactions.

"In permitting, or not stopping, these short-term transactions, the [fund companies] violated their fiduciary obligation to protect the value on behalf of [investors]."

© 2007 The Globe and Mail. All rights reserved.

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