Legg faces fine, other measures in funds probe

Breakpoint discounts allegedly denied clients

$2.3 million penalty proposed

Firm acknowledges flaws in policies and procedures

November 15, 2003|By Paul Adams | Paul Adams,SUN STAFF

Legg Mason Inc. said yesterday that it faces a possible $2.3 million fine and other regulatory action after allegations that it overcharged customers who purchased large amounts of a certain type of mutual fund shares.

The proposed fine is part of a broader Securities and Exchange Commission crackdown on brokerage firms that have denied customers so-called breakpoint discounts. The volume discounts are supposed to be paid to customers who make large purchases of Class A mutual fund shares, which carry an upfront sales charge.

In recent Senate testimony on mutual fund industry abuses, Stephen M. Cutler, the SEC's director of enforcement, said the failure to pay customers appropriate breakpoint discounts is rampant within the industry and is among the agency's priorities for enforcement action. The agency's investigation of Legg and a number of other firms dates to the beginning of the year.

The SEC and National Association of Securities Dealers also have proposed that Legg reimburse customers who were affected. The fine and reimbursement are not expected to have a material effect on the firm's finances, the company said.

"Management is fully committed to ensuring that Legg Mason meets the highest standards in the industry and continues to uphold our reputation for putting client's interests first," said Maura Fox, a spokeswoman for the firm. "We are committed to resolving all breakpoint discrepancies to our client's full satisfaction."

Fox said a letter will go out to all of Legg's retail customers, saying that the firm discovered "flaws in its policies and procedures" related to breakpoint discounts. The company said it implemented new procedures in February to correct the problem.

The problem is understood to affect only Class A shares of nonproprietary funds sold by Legg brokers. Legg does not sell Class A shares for any of its own funds.

Fox said the company is reviewing all sales of Class A shares totaling $2,500 or more dating to January 2001. Any customers who failed to receive the appropriate breakpoint discount will be reimbursed, she said.

Analysts described the fine as little more than a slap on the wrist for Legg, which manages nearly $240 billion in assets and has seen its stock gain nearly 70 percent this year amid record earnings. None expect investors to punish Legg in the same way they have firms caught up in scandals involving market timing and late trading.

"I don't think any of the miscalculations were intentional and I'm certain they'll be more than willing to make any amends with investors," said Robert Hansen, an equity analyst with Standard & Poor's. "We think the company has a solid track record and will continue to attract both retail and institutional customers."

Shareholder advocates say the revelations are just an addition to those that have come to light as a result of a broadening probe of industry abuses precipitated by New York Attorney General Eliot Spitzer.

Mercer E. Bullard, president of Fund Democracy Inc., a shareholder-advocacy group, said the breakpoint-discount violations are part of a systemic failure within the industry.

As have dozens of other mutual fund firms, Legg also has been subpoenaed by Spitzer's office as part of his probe into market timing and late trading. In yesterday's SEC filing, the company said it is cooperating with the investigation and is conducting its own internal probe.

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