It was a little more than a year ago that Brian Zino and company at J. & W. Seligman decided to fight New York Attorney General Eliot Spitzer rather than roll over. Zino, the fund firm's president and CEO, was among those who sued Eliot Spitzer's office in Federal court in September 2005, claiming that he had overstepped his legal authority and had usurped powers rightly resting with Congress and the SEC.

Yesterday, the nation's celebrity attorney general paid Zino and crew back in kind and filed a civil suit in State Supreme Court in Manhattan, claiming that Zino and Seligman violated New York's Martin Act by fraudulently buying and selling fund shares. The claim revolves around the alleged failure of Seligman to disclose agreements with hedge funds and other investors that granted them exceptions to the round trip trade limits in the funds' prospectuses.

Spitzer pulled out his usual stops, with a press release written to plead his case in the court of public opinion rather than the court room. The release included juicy quotes from senior executives and a 46-page complaint that alleges Seligman made 35 agreements that allowed market timing of its funds by third parties.

What remains to be seen is if Spitzer's courtroom attorneys can translate the allegations into a coherent case in front of a judge and jury. That was something that lead prosecutor Edward Wilson was unable to do when Spitzer pressed home his charges against Theodore Sihpol a summer ago.

One problem that Spitzer may face is apparent even from the quotes his office chose to pull from the emails. None of the four quotations contains evidence that Seligman violated any laws or even that it entered into any market-timing agreements. Instead, each of the quotes is from portfolio managers pointing out to Zino and other senior executives the problems that timers are creating in their funds. The pull-quotes do not include Zino's responses. If this is the most compelling evidence he has, Spitzer may find the jury once again snoozing while his prosecutors make their case.

1. In December 2002, Seligman’s national sales director complained in an e-mail that timing activity: "disrupts fund operations [and] steals performance from the other investors . . .."

The same executive anguished over his role in the schemes and said he felt like a character in the well-known war movie "Apocalypse Now." He described "the horror" of the situation and said he was:

"...tortured by this wrenching nightmare of timing money that is slowly churning like a cancer eroding away at the foundations of our complex . . . ."

2. In January 2001, the portfolio manager for the Seligman International Fund wrote to the chief investment officer, informing him that:

"the execution costs [caused by timing activity] are huge to our existing shareholders. . . . Thus, I think so far, this activity has cost the fund about [1.4 percent]."

3. In November 2002, a Seligman employee wrote this email to the president of Seligman Advisors Inc. to warn about timing activity:

"I write this memo to bring to your attention an escalating problem that threatens the performance of our funds . . . . It is the practice of [fund timing] by professional traders (usually hedge funds), which loots percentage points in total return from the funds these traders utilize. . . . [I]t is a ticking time bomb for the entire mutual fund industry, set to go off the day the press realizes that fund companies routinely sell the returns earned by the shareholders of their funds to short-term traders."

4. In November 2002, the head of an affiliated company wrote this email to the national sales director: "I spoke to [the Chief Investment Officer] and Brian Zino about this relationship and I continue to feel very uncomfortable about the risks we are assuming in keeping it on our books. Based on my prior e-mails with you, I want to move immediately in getting this group out of the complex. They show absolutely no interest in adhering to our policies and with the risks we incur, this is going to come back and bite us. . . . [W]e are allowing what the regulators and watchdogs have been calling ‘unethical practices’ which are done at the expense of fund shareholders."

In the complaint, Spitzer specifically alleges that the timing arrangements cost shareholders of the Seligman funds no less than $80 million.

He also takes aim at efforts by Seligman executives to fight in the court of public opinion:

"...the Defendants disseminated misleading press releases after the OAG began its industry-wide investigation into mutual fund timing. Issued in January 2004 and January 2005 and entitled 'Message to Shareholders,' the deceptive press releases told the public that Seligman had relationships with four timers (in fact there were at least 40) and that the damages from timing were $6 million (instead of $80 million).

Finally, Spitzer also goes after Zino and others for using the funds' "rubber stamp" boards to approve fee increases for the funds that made them "among the five most expensive fund families in the United States, despite lackluster performance." He also noted that the funds charged lower fees to third parties than to its funds. He did not note, however, that institutional funds routinely charge different pricing that the advisory fees paid on fund firms.

For their part, Seligman officials have not commented on Spitzer's complaint. However, Daniel Pollack, a lawyer for Seligman, told the Associated Press that the suit has no merit.  

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