Fund Times: Van Wagoner to Pay for Mispricing Stocks

The Securities and Exchange Commission announced Thursday that Van Wagoner Capital Management, Inc. (VWCM), the investment advisor to the Van Wagoner Funds, and firm president and founder Garrett Van Wagoner, settled charges that they defrauded fundholders and mispriced illiquid securities held by the funds. The settlement includes an $800,000 penalty from Van Wagoner and VWCM, a seven-year prohibition on Van Wagoner serving as an officer or director of a mutual fund, and a seven-year restriction on certain of Van Wagoner's activities with the investment advisor.

The SEC also said San Francisco-based VWCM will initiate compliance measures designed to protect against future violations. Specifically, the investment advisor will hire an independent consultant who will make recommendations to improve the procedures for determining the pricing and liquidity of private equity investments.

Van Wagoner Capital Management first disclosed in March 2003 that the SEC provided notice in September 2002 of its recommendation to begin proceedings against the fund firm.

At the time of the misconduct by Van Wagoner and VWCM, the shop ran five mutual funds that invested primarily in technology stocks. From 1999 through 2001, the SEC points out, Van Wagoner invested in illiquid securities issued by private companies, with the hope that the investments would produce large returns when the private companies went public. However, these securities were risky to hold in large quantities because they could not be readily sold or valued based upon market quotations. To address the risks, Van Wagoner told shareholders that he would limit these investments to 15% of the value of the funds' portfolios.

Although VWCM neither admitted nor denied the SEC's allegations, the Commission found that Garrett Van Wagoner and VWCM misled the funds' shareholders about the size and value of the funds' investments in illiquid securities, which obscured the fact that the funds' holdings in those securities exceeded the limits promised in the funds' shareholder disclosures.

BlackRock to Buy State Street Research
New York-based  BlackRock (BLK) announced Thursday that it will acquire State Street Research & Management Company (SSRM) from  MetLife (MET) for $375 million in cash and stock.

Under the terms of the transaction, which has been approved by the boards of directors of BlackRock and MetLife, MetLife will receive at closing $325 million in cash and $50 million of BlackRock class A common stock. At the end of July, BlackRock, which is best known for its bond investments, had $314 billion of assets under management, while SSRM, the holding company of State Street Research and SSR Realty Advisors Inc. that specializes in investments for both institutional and retail clients (no relation to publicly traded asset manager  State Street (STT)), had $52 billion of assets under management as of June 30. With $366 billion of assets under management, the combined company would be one of the 20 largest asset managers in the world, the companies said in a press release. The combined firm will operate under the BlackRock name.

"At first glance, it appears that BlackRock is getting a good deal, paying just $375 million total in cash and stock, with the potential for the price to go up 25% depending on performance. At the low end, this equates to just 0.72% of SSRM's $52 billion of assets under management, well below a common price of around 2%,"  said Morningstar senior stock analyst Craig Woker.

In terms of the fund operations, the addition of SSRM will certainly diversify BlackRock's investment management platform, adding additional equity, alternative investment, and real-estate equity management capabilities. Morningstar senior fund analyst Paul Herbert points out, however, that Morningstar analysts always watch fund company mergers closely to make sure they are shareholder-friendly. "Specifically, we pay attention to fund fees to determine whether they will at least stay at the same levels. We hope they'll fall. BlackRock is very conscious of the fee levels for its funds, and early indications are that it will do a better-than-average job of making sure they are reasonable," Herbert said.

Herbert also points out that he's concerned with personnel decisions, as mergers often result in a talent exodus. "We're interested to see what Kim Goodwin's role will be going forward," Herbert added. Goodwin, who formerly served as comanager of  American Century Growth (TWCGX) and the chief of American Century's large-cap growth-stock investing team, became the chief investment officer of equity investing at State Street Research & Management in August 2002.

The deal is expected to close in early 2005, pending required regulatory and fund shareholder approval and satisfaction of other customary closing conditions, according to the companies.

Salomon Brothers Loses Cunningham to Seligman
Jack Cunningham, who most recently was head of Salomon Brothers Asset Management's manager/analyst equity group and managed  Salomon Brothers Investors Value (SAIFX) and  Smith Barney Large Cap Value , left Salomon Brothers to become chief investment officer of J&W Seligman. Cunningham will serve as head of Seligman's core investing group, as well as lead manager of  Seligman Common Stock  and comanager of  Seligman Income and Growth .

At Salomon, according to an SEC filing, Investors Value comanager Mark McAllister (who also runs  Smith Barney Capital & Income (SOPAX)) will take over as lead manager of Investors Value and Large Cap Value, and Rob Feitler, another experienced member of the Salomon Brothers analyst/manager group and team leader of  Salomon Brothers Small Cap Growth (SASMX), has been named as comanager of Investors Value and Large Cap Value.

Etc.
Numeric Investors announced that Shannon Vanderhooft, head of the firm's Small Cap and Momentum Group, will leave Numeric at year-end to spend more time with her children, Numeric said. She and Dan Taylor have comanaged  N/I Numeric Emerging Growth  and  N/I Numeric Growth . The firm said Vanderhooft will work with Numeric to ensure a smooth transition, and that Dan Taylor assume progressively more responsibility for the management of these portfolios. Over the next few months, Numeric said it will reinforce this group with additional portfolio management capability.

 State Street (STT) (not affiliated with the firm State Street Research & Management mentioned above) said Timothy B. Harbert, the chairman and chief executive of its State Street Global Advisors unit died of a heart attack on Aug. 24. He had been head of State Street Global Advisors since 2001.