Securities bureau says ING committed fraud



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The state Bureau of Securities Regulation is charging ING Life Insurance and Annuity with fraud and is threatening to revoke the company’s broker’s license. The bureau on June 8 accused ING — the company that handles $180 million in New Hampshire state workers’ individual retirement plans - of holding back information on market timing activity and with pushing its own mutual funds without disclosing that those funds were sharing more revenue with ING. The state ordered ING to show cause at a hearing why the bureau should not put it out of business in the state. “We are surprised and disappointed” at the bureau’s action, said ING spokesperson Dana Ripley. “We believe we have cooperated fully and in good faith with the bureau’s request, and we will continue to try to resolve this matter.” But Bureau Deputy Director Jeffrey Spill disputed that claim, saying that the company was making it hard for the state to question witnesses, obtain e-mails or get documents to determine the extent of the damage suffered by the state fund. “We find some of their tactics not cooperative,” he said. ING is a Dutch-owned firm with U.S. headquarters in Hartford, Conn., and manages the state’s 457(b) accounts, similar to a private employee’s 401(k), and unrelated to the New Hampshire Retirement System. About a quarter of the state’s 12,000 employees contribute to the fund, which the state does not pay into. ING offers state workers a variety of fund options - such as those offered by Fidelity, Vanguard and Janus — but nearly 65 percent of the money is held in various ING mutual funds. The state Deferred Compensation Commission - which oversees the fund - hired Aetna Life and Insurance and Annuity Company to handle the finances in 1999, and ING acquired Aetna in 2000. The commission makes the final decision of what funds to offer state workers, but these decisions are usually based on ING’s recommendations. What the commission says it didn’t know about was that ING had certain payment arrangements with its own funds - specifically ING, Oppenheimer and American Mutual. Instead, the bureau charges ING “led the commission to believe that the funds were chosen solely based on performance” when actually ING required that those particular funds “target revenue back” to ING. For instance, the bureau said, ING recommended discontinuing a Janus fund supposedly because it didn’t perform well and it had market timing issues. But some of ING’s own funds performed even worse, and ING had its own market timing issues. Market timing involves making frequent trades into and out of mutual funds to take advantage of market fluctuations. Most funds have policies against market timing because it harms long-term investors by allowing the market timer to siphon off short-term profits and dilute the value of the fund. It also increases transactional costs. The National Association of Securities Dealers last October ordered ING to pay a fine of $1.5 million for permitting improper market timing in ING funds and related violations — the largest fine NASD has imposed in a market timing case. NASD also ordered ING to pay more than $1.4 million in restitution to the affected mutual funds. It also imposed a $25,000 fine and 30-day supervisory suspension on ING supervisor William L. Sessions. But that case involved ING’s own employees engaged in market timing, Spill said. In the New Hampshire case, the timing stemmed from individual traders and brokers outside of ING. Much of this timing had been taking place for a long time, allowed by companies that ING had recently acquired. Officials at the company were hesitant to crack down on it, because the traders were some of ING’s biggest customers, the bureau said. One e-mail disclosed by the bureau indicated that marketing timing trades were as large as $50 million. ING finally put an end to most of the market timing practices by 2003. The problem was that ING didn’t inform the commission about the move until much later and never reimbursed the commission for losses despite promising to do so, the bureau said. The bureau’s staff issued the show cause order, and the matter will be decided by a hearing officer at the bureau. Securities Regulation Bureau Director Mark Connelly will not hear the case, since he also sits on the commission. Spill said Connelly also has recused himself from the commission when it considers matters relating to ING, sending another bureau employee in his stead.

 

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