http://www.fundalarm.com/arc1103.htm

(Originally posted January 1, 2004)
[Archive Table of Contents]

More than three years after a couple of Heartland muni funds suffered massive devaluations, the SEC finally filed civil fraud charges against the firm .....And even after several months of scandal fatigue, at least two of the Heartland allegations are stunning: A trio of the firm's senior executives, including CEO William Nasgovitz, sold their own holdings in the failing funds before the news was made public.....Also, late in the crisis, Heartland's legal counsel sent an e-mail to her colleagues, advising them to purge their files of any materials related to "portfolio securities, underlying credits and valuation issues".....Several other allegations in the Heartland case are serious, but almost anticlimactic:

The company failed to do the proper credit research, and failed to manage the funds' liquidity;


The funds held high percentages of unrated bonds, in violation of prospectus provisions;


Over a period of six months, several key executives, as well as fund managers, repeatedly manipulated the prices of fund holdings;


Heartland misrepresented the cause of the devaluations in an official SEC filing.


As usual, the SEC case carries only potential financial penalties, but some of the alleged conduct clearly verges on the criminal (it's interesting to note that Heartland specifically denies only one allegation: That Nasgovitz engaged in insider trading) .....If you own Heartland funds, you might want to keep a close eye on the criminal angle.....If the U.S. Attorney gets involved, we're talking slammer time, and the possible end of Heartland as a firm.