Steer Clear of Alger Funds
Agreement in principle reached, but our stance unchanged.
On June 9, 2006, Fred Alger Management announced that it had reached an agreement in principle with both the New York Attorney General and the SEC. In the proposed agreement, there is a payment of $40 million and a reduction of management fees of $1 million per year for five years. After a settlement is finalized, we can consider the regulators to be satisfied, but until that time, we cannot assume that stance in this case. The violations at Alger were particularly egregious.
In October 2003, James Connelly, head of fund sales for Fred Alger Management Inc., settled civil charges with the SEC for permitting market-timing, and he pleaded guilty to obstructing the investigation. According to New York Attorney General Eliot Spitzer, Connelly asked subordinates to delete e-mail messages relating to timing arrangements. In addition, Alger said "potential late trading activity by [a] hedge fund" occurred in three accounts from March 2003 to August 2003. (Click here for Alger's statement.) It was a dramatic fall for Connelly, who was named Fund Leader of the Year by Fund Action for 2002; he was asked to resign in 2003 and later served time for his actions. We should note that Connelly is long gone and that we've been impressed with the firm's improved compliance efforts since his departure.
In the SEC's settlement, it found that "From the mid-1990s until 2003, Connelly was involved in allocating timing capacity in Alger mutual funds to timing investors. Connelly regularly authorized select investors to time the Alger Fund. Connelly did this even though he knew that the timers were making substantially more than the permitted six exchanges per year." The funds' prospectus limited investors to six transactions per year.