New York state Attorney General Eliot Spitzer announced yet another market timing settlement agreement today, this one with Federated Investors Inc.

The settlement with the Pittsburgh-based company was reached in conjunction with the Securities and Exchange Commission and announced simultaneously today. Under the latest agreement, Federated will pay a total of US$35 million in restitution to injured investors and US$45 million in civil penalties, and will reduce its management fees by an estimated US$20 million over the next five years. The US$35 million payment includes US$8 million already paid by Federated as restitution to certain Federated funds.

Federated has also agreed to substantial reforms including the hiring of a full-time senior officer to help ensure that advisory fees charged for managing the funds are negotiated at arm’s length and are reasonable.

The investigation of the company centered around mutual fund market timing, which involves the frequent buying and selling of mutual funds. The attorney general said that, in breach of its fiduciary obligations, Federated entered into secret “market timing” arrangements with three professional trading organizations knowing that these arrangements would negatively impact the investment returns of ordinary mutual fund shareholders. Federated also tolerated a substantial amount of harmful transactions by market timers with which it had no express arrangement. Federated had an incentive to allow these frequent trading activities because it earned substantial investment advisory fees on the fund timers’ assets.

“Federated worked with regulators to address problems with improper trading,” Spitzer said. “With this agreement, virtually the entire mutual fund industry has now sworn off improper trading practices and agreed to compensate investors who were harmed.”

Federated is the 14th firm to settle improper mutual fund trading charges since the attorney general announced a landmark case against Canary Capital Partners in September 2003. To date, the investigations emanating from the Canary case have returned approximately US$3.3 billion to investors. In addition, nine mutual fund executives have pleaded guilty to fraud and related charges.

“By allowing undisclosed market timing in Federated funds, FIMC disregarded its fiduciary duties to the funds’ long-term shareholders. The commission will continue to pursue mutual fund advisers, and other fiduciaries, who place their interests above those of fund investors,” said Linda Chatman Thomsen, director of the SEC’s division of enforcement.