Legg suffers 2 jolts in wallet

Federal judge upholds $19.7 million jury award

Company is fined $2.3 million

SEC, NASD say it failed to pay customer discounts

February 13, 2004|By Paul Adams | Paul Adams,SUN STAFF

Legg Mason Inc. has suffered a pair of financial jolts as regulators fined the company $2.3 million for not giving volume discounts to customers who bought a certain class of mutual fund shares and a federal judge refused to reduce a $19.7 million jury award related to a copyright-infringement case.

The Baltimore company is among 15 that were penalized $21.5 million yesterday by the Securities and Exchange Commission and the National Association of Securities Dealers as part of an industrywide crackdown on companies that routinely failed to pay so-called breakpoint discounts owed to customers.

The $2.3 million fine doesn't include the amount that Legg will have to return to the customers who were overcharged, the SEC said. In an SEC filing this week, Legg said it had "accrued" $4.3 million to cover the settlement.

"Our actions and the NASD's are a message to every broker-dealer: You must exercise due care to provide appropriate discounts to mutual-fund investors, or enforcement action will be taken against you, and substantial penalties will be imposed," said Stephen M. Cutler, the SEC's director of enforcement, in a statement.

Legg officials declined to comment on the regulatory action, referring instead to the company's statements in an SEC filing posted Wednesday. The company said in a November filing that it expected to pay the fine.

In the copyright case, Legg said it plans to appeal damages awarded by a jury in October to Lowry's Reports Inc. of North Palm Beach, Fla. The publisher had filed suit claiming Legg distributed copies of its financial newsletter to its brokers throughout the company but paid only for a single $700 annual subscription.

The jury award is among the largest ever in an intellectual-property case. Legg had argued that the amount was excessive and that the damages amounted to $59,000.

"The evidence indicated that Legg Mason was a sophisticated entity that repeatedly infringed Lowry's copyrights, even when asked to stop," Judge William D. Quarles Jr. wrote in his decision, signed Wednesday, in which he denied Legg's motion for a new trial and judgment. "In light of this evidence, the court will not modify the jury's award or order a new trial because of its size." The judge also denied Lowry's request for payment of attorneys' fees and other costs.

"We are disappointed by the judge's decision, and we intend to appeal," Legg spokeswoman Maura Fox said yesterday.

Neither the SEC fine nor the jury award is expected to have a significant financial impact on Legg, which last month reported record earnings. But the SEC fine comes as an embarrassment to Legg and other companies caught up in the government's latest regulatory action, analysts said.

Federal and state regulators are in the midst of a sweeping investigation of the $7.4 trillion mutual-fund industry after revelations that many companies have engaged in abusive trading practices. Legg has not been accused in any of the cases involving late-trading and market timing, which have resulted in $1 billion in penalties against several companies.

"It gives them possibly the reputation that they have cheated clients," said Jeff Tjornehoj, a research analyst with Lipper Inc., a fund-tracking company. "To some brokers' credit, they may not have understood the breakpoint policy."

Customers who invest large sums in Class A mutual fund shares are often entitled to breakpoint discounts, which amount to a reduction in the upfront sales commission. Typically, the discounts start at the $50,000 level and increase in regular increments above that amount. At $1 million, customers typically pay no sales commission.

The NASD estimates that brokers at hundreds of companies failed to pass on $86 million in discounts from 2001 to 2002. Overall, the NASD found that discounts were not provided about 20 percent of the time, costing affected investors an average of about $243 per transaction.

The SEC says Legg failed to provide customers with the discount almost 35 percent of the time. Legg and the other companies censured yesterday were singled out in part because of their high incidence of violations and the dollar amounts involved, the SEC said. Wachovia Securities LLC was fined the most, $4.8 million.

In many instances, the violations by Legg and others were probably the result of back-office errors, said Mike Ford-Taggart, an analyst with Morningstar in Chicago. Analysts don't expect Legg to be punished by investors for the violations.

In its November filing, Legg said it was sending a letter to customers informing them of the errors involving breakpoint discounts. The company also pledged to repay with interest any money owed to customers who didn't receive the appropriate discounts.

Seven of the 15 companies settled with the SEC and the NASD.

In addition to Legg Mason, they are American Express Financial Advisors; Linsco/Private Ledger Corp.; Raymond James Financial Services; UBS Financial Services; H.D. Vest Investment Securities; and Wachovia Securities.

The other eight, which reached accords with t the NASD only, are Bear, Stearns & Co.; Brecek & Young Advisors; Cresap Inc.; Kirkpatrick, Pettis, Smith, Polian Inc.; Lehman Brothers; David Lerner Associates; Southwest Securities and SWS Financial Services.

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