Janus Capital Group said Friday it would pay $31.5 million to reimburse shareholders for allowing improper mutual fund trading, in one of several steps aimed at reassuring wary investors amid a massive industry scandal.

But the firm said it was not yet clear how the $31.5 million — which amounts to just around one penny per share of the seven mutual funds involved — would be paid out.

The Denver mutual fund firm also said its president and chief executive officer, Mark Whiston, would not become chairman of the company on Jan. 1, as originally planned. And it announced plans to end its "soft-dollar" arrangements, a controversial practice in which fund firms use brokerage commissions to purchase research products and services from third parties.

Shares in Janus Capital Group jumped $1.08, or 7.28 percent, to $15.91 in trading Friday on the New York Stock Exchange.

The attempts to improve internal controls and strengthen corporate governance do not resolve regulators’ ongoing investigations of the firm, Janus cautioned. The Securities and Exchange Commission, New York Attorney General Eliot Spitzer and Colorado Attorney General Ken Salazar are among those looking at Janus. The probes follow allegations that the company allowed certain investors to frequently trade in its mutual funds, at the expense of long- term investors.

Janus has not been charged with any wrongdoing, although the firm said Friday it expects that regulators will seek to have the firm pay civil penalties and make some changes as a result of the alleged improper behavior. Frequent trading is not illegal, but Janus had regularly told shareholders it was discouraged.

Industry consultant Geoff Bobroff said Janus appears to be ahead of some firms involved in the massive mutual fund scandal in terms of determining a specific dollar amount that the trading cost. But, he and other analysts noted, that’s partly because the firm was among the first named in the scandal and, therefore, has had more time to respond.

Still, Russ Kinnel, director of mutual fund analysis for research firm Morningstar, said the announcements Friday appeared to be "positive steps" for the firm.

"Initially their stance was more kind of (like), ‘Everyone’s doing it, why are you picking on us?’ And since then they’ve taken a real constructive tone and said, ‘We need to make some changes,’ and they’re doing that," Kinnel said.

But, Kinnel cautioned, it’s still not clear whether regulators may find other causes for concern at the firm. And, outside of its role in the mutual fund scandal, he said Janus also has other work to do, including improving mutual fund performance and naming a new chief investment officer.

The costs associated with the frequent trading were determined by auditors Ernst & Young, who were hired through legal counsel for the Janus funds’ independent trustees.

In a letter to shareholders, the trustees said Ernst & Young found that Janus made 10 deals to allow frequent trading between November 2001 and mid- 2003. The auditors said four of those investors regularly engaged in frequent trading.

Another four investors traded three or four times in a single Janus fund before being barred from further investments, the auditors said. And the remaining two had 10 or fewer trades in multiple funds but generally held their investments in the funds for longer than just overnight.

Janus earlier said it believed 12 frequent-trading arrangements had been made. But spokeswoman Shelley Peterson said Friday that two of the parties appear to have made such deals but then never invested in the firms’ funds. All such deals have been terminated, the firm has said.

The auditors determined that the trading by the 10 investors cost $31.5 million, including $22.8 million in gains realized by those traders.

Investors also lost another $2.7 million because those net gains were not available to the funds, the auditors said. The company also earned $1 million in management fees and waived $5 million in redemption fees from the frequent traders.

Janus took a charge in the third quarter that included $6 million of that total; the rest will be included in the fourth quarter’s financial results, Janus said.

Janus also announced plans for independent director Steve Scheid, former vice chairman of Charles Schwab, to become non-executive board chairman on Jan. 1. Whiston had originally been scheduled to take on that role, replacing Landon Rowland, who was head of Janus’ former parent firm, Stilwell Financial. Rowland and Whiston will continue as board members, Janus said.

Still, the board signaled its redoubled support for Whiston, who has been at the helm of the firm during a tumultuous year marred by the firm’s involvement in the mutual fund scandal.



Whiston’s employment contract was extended for one year, through 2006, although his 2003 bonus formula and potential severance benefits agreement was restructured.

Mercer Bullard, a securities law professor at the University of Mississippi and founder of the shareholder advocacy group Fund Democracy, said some of Janus’ moves announced Friday appeared to be positive, but he was less impressed with the board’s decision to extend Whiston’s contract.

He said he believes Whiston’s communications with shareholders have seemed to imply that he has "more interest in exculpation than in being forthright."

Rachel Barnard, an analyst with Morningstar who covers Janus, said the company may be a little ahead of other firms involved in the scandal, in terms of determining a reimbursement amount.

But, she said, other firms have gone further in terms of getting rid of executives who were in leadership roles when frequent-trading activity occurred. If the board is going to back Whiston, she said, they must also convince Janus stock investors that is the right move.

"It certainly happened on his watch, and he’s certainly responsible for the company, so I think he has an uphill battle to prove that he is the one that’s looking out for the best interest of shareholders," she said.

A Janus spokeswoman said Whiston declined to comment beyond the statements released Friday.

Whiston has previously declined to comment on whether he had knowledge of any frequent-trading agreements prior to the investigation, citing the company’s legal situation.

Janus has said that several employees the company believes were central to the frequent-trading agreements are no longer with the company.

Janus also plans to stop using brokerage commissions to purchase research products and services from third parties, a decision that will cost the firm about $9 million annually. Such "soft- dollar" practices have become increasingly controversial in recent months amid the growing mutual fund scandal.

Bullard said the elimination of soft-dollar arrangements is "a very good step" that’s consistent with what consumer groups have called for.

Janus also said Friday that its board of directors would retain an independent auditor to look at its financials.

In addition, the board will recommend that independent trustees for the Janus funds appoint an independent compliance officer, Janus said. That person would review letters to shareholders, marketing efforts and other communications, Janus’ Peterson said.

On Sept. 3, Spitzer accused Janus and three other fund firms of allowing a hedge fund, Canary Capital, to frequently trade in their funds. Janus later admitted it allowed some frequent trading, although it will not say whether Canary was one of the investors involved.

The accusations sparked a massive scandal that has rocked the mutual fund industry and led to calls for major reforms.

Janus is one of many prominent fund firms involved, as are Putnam, Alliance and Bank of America. On Dec. 2, Spitzer and the SEC filed civil fraud charges against Invesco Funds Group, another Denver mutual fund shop, accusing that firm of harming investors by allowing frequent trading.

Invesco’s parent firm, London-based Amvescap, has vowed to vigorously fight the charges, arguing that it allowed frequent trading only in a controlled way that did not harm long-term investors.

linna@RockyMountainNews.com or 303-892-2544

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