Feb. 4–Federal securities regulators are conducting an inquiry into a Milwaukee mutual fund affiliated with U.S. Bancorp for what the fund calls “potentially improper trading” of a security in itsportfolio.

The informal probe by the Securities and Exchange Commission into the First American Small Cap Growth Opportunities Fund began after the fund’s adviser — U.S. Bancorp Asset Management — voluntarily notified the SEC about the possible violation, said U.S. Bancorp spokeswoman Cheryl Stone.

U.S. Bancorp Asset Management is a subsidiary of the Minneapolis-based banking firm and adviser for the First American family of funds.

In an interview Tuesday, Stone said a routine internal review in the fourth quarter of 2003 uncovered the potential trading infraction, which took place in 2002. U.S. Bancorp Asset Management then hired the national law firm Kirkpatrick & Lockhart to look into the trades. That investigation concluded that no securities laws were broken by the adviser’s employees, she said.

The SEC was told Friday about the trading concerns, she said, and the fund disclosed the matter in its prospectus.

Stone said she could not reveal the nature of the trading under investigation, nor who was involved, because the company does not comment on “employee matters.”

“All that I can tell you is that the activity did not involve late trading or market timing, and it did not involve any personal gain or loss for any U.S. Bancorp Asset Management employee,” Stone said.

The SEC, as is its policy, would not confirm whether it is investigating the fund.

The First American Small Cap Growth Opportunities Fund, which had $551.3 million in assets at the end of 2003, is the last of U.S. Bancorp’s mutual funds managed in Milwaukee. Most of the company’s investment operations moved to Minneapolis after Milwaukee’s Firstar Corp. and U.S. Bancorp merged in 2001 and agreed to make Minneapolis the corporate headquarters.

The fund, which invests in the stock of relatively small companies with growth potential, is managed by Joseph Frohna and Brian R. Bies. On Tuesday, Bies referred questions to Stone. Frohna was traveling and could not be reached for comment.

Stone said both remain managers of the fund.

Stone said she did not know when the SEC would complete the investigation.

“We’ll continue to cooperate fully with the SEC. There’s really no way to predict or anticipate any timing of their review or whether there will be any additional conclusions,” Stone said.

Christopher Davis, a fund analyst who covers the First American Small Cap Growth Opportunities Fund for Morningstar Inc. in Chicago, said it is unfortunate that the company has not disclosed the nature of the trading that raised concerns.

“I think it’s always sort of distressing when there isn’t a lot of candor. I think investors do deserve that,” Davis said.

The fund outperformed its peers in 2003 with a total return of 59 percent, according to Morningstar. Through Jan. 31, it was up 4.9 percent for the year.

Davis said the fund has been “a pretty strong performer,” but he was critical of its above-average expense ratio of 1.93 percent.

The First American Small Cap Growth Opportunities Fund is the fourth Milwaukee-area mutual fund or mutual fund adviser to fall under the scrutiny of the SEC or other authorities recently.

Strong Capital Management Inc. of Menomonee Falls was among firms singled out in September by New York Attorney General Eliot Spitzer on accusations of allowing a New Jersey hedge fund to make timed trades that weren’t available to long-term investors in the funds. He later accused company founder Richard S. Strong of personally profiting from improper trading. Richard Strong has said his trading was not disruptive to the funds.

Milwaukee’s Artisan Partners, another mutual fund manager, was subpoenaed last fall by Spitzer’s office in connection with trades involving a hedge fund. The company said it was cooperating with regulators and had ended the hedge fund relationship even before it was aware of Spitzer’s investigation.

Heartland Advisors Inc. of Milwaukee was accused of fraud and insider trading in a December lawsuit filed by the SEC. The suit revolves around drastic cuts to the value of two high-yield municipal bond funds Heartland managed in 2000.

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(c) 2004, Milwaukee Journal Sentinel. Distributed by Knight Ridder/Tribune Business News.

USB,

SEC probes fund tied to U.S. Bancorp

City firm says it told agency of trade concerns

By PAUL GORES pgores@journalsentinel.com, Journal Sentinel

Wednesday, February 4, 2004

Federal securities regulators are conducting an inquiry into a Milwaukee mutual fund affiliated with U.S. Bancorp for what the fund calls “potentially improper trading” of a security in its portfolio.

The informal probe by the Securities and Exchange Commission into the First American Small Cap Growth Opportunities Fund began after the fund’s adviser — U.S. Bancorp Asset Management — voluntarily notified the SEC about the possible violation, said U.S. Bancorp spokeswoman Cheryl Stone.

U.S. Bancorp Asset Management is a subsidiary of the Minneapolis- based banking firm and adviser for the First American family of funds.

In an interview Tuesday, Stone said a routine internal review in the fourth quarter of 2003 uncovered the potential trading infraction, which took place in 2002. U.S. Bancorp Asset Management then hired the national law firm Kirkpatrick & Lockhart to look into the trades. That investigation concluded that no securities laws were broken by the adviser’s employees, she said.

The SEC was told Friday about the trading concerns, she said, and the fund disclosed the matter in its prospectus.

Stone said she could not reveal the nature of the trading under investigation, nor who was involved, because the company does not comment on “employee matters.”

“All that I can tell you is that the activity did not involve late trading or market timing, and it did not involve any personal gain or loss for any U.S. Bancorp Asset Management employee,” Stone said.

The SEC, as is its policy, would not confirm whether it is investigating the fund.

The First American Small Cap Growth Opportunities Fund, which had $551.3 million in assets at the end of 2003, is the last of U.S. Bancorp’s mutual funds managed in Milwaukee. Most of the company’s investment operations moved to Minneapolis after Milwaukee’s Firstar Corp. and U.S. Bancorp merged in 2001 and agreed to make Minneapolis the corporate headquarters.

The fund, which invests in the stock of relatively small companies with growth potential, is managed by Joseph Frohna and Brian R. Bies. On Tuesday, Bies referred questions to Stone. Frohna was traveling and could not be reached for comment.

Stone said both remain managers of the fund.

Stone said she did not know when the SEC would complete the investigation.

“We’ll continue to cooperate fully with the SEC. There’s really no way to predict or anticipate any timing of their review or whether there will be any additional conclusions,” Stone said.

Christopher Davis, a fund analyst who covers the First American Small Cap Growth Opportunities Fund for Morningstar Inc. in Chicago, said it is unfortunate that the company has not disclosed the nature of the trading that raised concerns.

“I think it’s always sort of distressing when there isn’t a lot of candor. I think investors do deserve that,” Davis said.

The fund outperformed its peers in 2003 with a total return of 59%, according to Morningstar. Through Jan. 31, it was up 4.9% for the year.

Davis said the fund has been “a pretty strong performer,” but he was critical of its above-average expense ratio of 1.93%.

The First American Small Cap Growth Opportunities Fund is the fourth Milwaukee-area mutual fund or mutual fund adviser to fall under the scrutiny of the SEC or other authorities recently.

Strong Capital Management Inc. of Menomonee Falls was among firms singled out in September by New York Attorney General Eliot Spitzer on accusations of allowing a New Jersey hedge fund to make timed trades that weren’t available to long-term investors in the funds. He later accused company founder Richard S. Strong of personally profiting from improper trading. Richard Strong has said his trading was not disruptive to the funds.

Milwaukee’s Artisan Partners, another mutual fund manager, was subpoenaed last fall by Spitzer’s office in connection with trades involving a hedge fund. The company said it was cooperating with regulators and had ended the hedge fund relationship even before it was aware of Spitzer’s investigation.

Heartland Advisors Inc. of Milwaukee was accused of fraud and insider trading in a December lawsuit filed by the SEC. The suit revolves around drastic cuts to the value of two high-yield municipal bond funds Heartland managed in 2000.