J & W Seligman Under Fire in New York for Timed Trading

In a lawsuit filed Tuesday in the state Supreme Court in Manhattan, New York State Attorney General Eliot Spitzer has alleged the mutual fund manager J & W Seligman & Co. improperly timed market trades and owes its investors some $80 million in compensation. Seligman President Brian Zino and others are specifically named in the suit.

Last year Spitzer sought a court order to compel the privately held company to produce documents and to make its employees available for testimony. The order came after an in-house investigation at Seligman produced only four cases of improper timing between 2001 and 2003 for which investors were repaid $2 million. At the same time, Seligman reduced its management fees with a resulting loss of $4 million.

Not satisfied with the result of these actions, however, Spitzer's subsequent investigation revealed an additional 35 timing agreements between 1998 and 2001.

"While it is certainly within a company's rights to continue to contest the evidence," Spitzer said, "the record shows that there was a clear breach of fiduciary duty at Seligman and that the company's damage estimates are inadequate."

In addition to the alleged illegal timing, the lawsuit also points to a series of fee increases that led to Seligman Funds being among the five most expensive funds in the nation in spite of a performance record described as "lackluster."

In response to the lawsuit Daniel Pollack, representing Seligman, called the charges a "series of exaggerations and mischaracterizations." The company's position is that it has fully disclosed all questionable activities to its investors and made appropriate restitution.

While market timing of mutual funds is not illegal per se, it is not allowed by many fund managers because it can have the net effect of diluting the value of shares. In similar proceedings in July, one of the nation's oldest mutual fund advisors, Waddell & Reed Financial, Inc. paid $50 million to settle a lawsuit brought as a result of Spitzer's ongoing investigation into improper mutual fund trading.