Inadequate Disclosure Costs Mutual Fund
By Mitchell S. Ostwald
The Dreyfus Corporation agreed to pay nearly $3 million to resolve charges brought by the Securities and Exchange Commissions (SEC) and the New York State Attorney General that the firm made inadequate or false disclosures about its once-hot Dreyfus Aggressive Growth Fund.
It was alleged that the Aggressive Growth Fund's performance was pumped up because of a disproportionate volume of stock the former fund manager, Michael Schonberg, was offered in initial public offerings (IPO).
The IPO's performed incredibly well, which provided a return of over a 119% during the eight months following its September, 1995 debut. Eighty-three percentage points of that return came from first-day gains of newly public stocks, according to the SEC order. Later, the funds performance dropped dramatically.
As part of the SEC settlement, neither Dreyfus nor Mr. Schonberg admitted nor denied guilt. Neither the SEC nor the New York State Attorney General's office had determined intentional wrongdoing by Dreyfus or its employees. Notwithstanding, Dreyfus thought it was in the best interest of its shareholders to resolve the case at this time.
While the SEC didn't find improper personal trading by Mr. Schonberg, the agency charged that Dreyfus didn't take appropriate steps to determine whether his personal trading created potential conflicts of interest.
This represents the continuing efforts of the SEC, as well as the NASD, including through legislation before Congress to require more accurate disclosures to investors on mutual fund companies. What this ruling does indicate is that while it is not illegal to have an unequal IPO distribution, regardless of the basis of how and why a fund performs well, honest and forthright disclosure must accompany a mutual fund company's disclosure.
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