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. Last Updated: 07/27/2016

FSC Nixes U.S. Fund Pallada's License

The first company to be granted a license to manage mutual funds in Russia has become the first to be refused a renewal.

The Federal Securities Commission on Tuesday denied Pallada Asset Management's request for a new mutual fund license, freezing the 71 million rubles ($2.5 million) the company has under management as well as its right to exercise any deals.

The FSC said the company provided insufficient data, but Pallada officials and industry insiders suggested there were more personal reasons for the refusal.

"We think that the FSC was searching for any excuse to leave Pallada without a license," said company spokesman Vadim Soskov.

Pallada was granted a license in 1996, a time when a Harvard University professor, Jonathan Hay, was advising then-FSC chairman Dmitry Vasilyev on stock market reform as part of a U.S. government-funded project. Hay's wife is Elizabeth Hebert, the founder and current general director of Pallada.

Vasilyev declined to comment on the matter Tuesday.

An analyst at a leading investment bank said the enmity between Vasilyev and Kostikov was the reason Pallada lost its license -- a contention refuted by the FSC.

"We did our best to give Pallada a chance to respond. And it was in our interests, too, to renew the license before it expired," said FSC spokesman Ilya Razbash. "But there is no chance that Pallada will have a new license on Wednesday. According to the law, after we get all the necessary documents, the FSC has 30 days to make a final decision," he said. The FSC said that it did not receive any documents from Pallada on Tuesday, though the company contends otherwise.

Current FSC chairman Igor Kostikov is the founder and former general director of a rival investment company, AVK. He denies he maintains any formal connection, but AVK became active in mutual funds only after he replaced Vasilyev as FSC chairman in February 2000.

Soskov said Pallada's problems started last May when it accused Kostikov and the FSC of unfairly favoring AVK.

Since then, Pallada has had problems registering a new investment fund called Pensions. And on Jan. 23, the FSC cancelled Pallada's additional share issue, which was registered three years ago.

Soskov said that Pallada first approached the FSC with a request to renew its license on Dec. 27, and the commission responded Jan. 18, asking for additional information. Pallada sent that information Feb. 1, but the FSC again rejected it Feb. 7, citing the same reasons, he said.

Soskov said there were two issues that the FSC asked for additional information on: the educational background of Hebert and the company's audited balance for 2001. "We don't know what is wrong with a masters degree from Columbia University. And as for the audit, it is physically impossible to get the balance audited before Feb. 12," he said.

U.S. State Street Global Advisors, the world's No. 4 pension fund manager with some $400 billion under management, paid more than $2 million for a 100 percent stake in Pallada in 1998.

Managers of other funds said Tuesday they were worried the Pallada case would hurt the industry's reputation.

"Of course, it is very negative news for the market when a well-known company for some reason loses its license. I don't exclude that this is management's fault, but it is hard to tell without knowing all the details," said Maria Churayeva, CEO of Russian Pioneer First, member of the U.S. PioGlobal asset managing group.

Pioneer First has $6.7 million in three local Russian investment funds and is managing an additional $75 million in the First Voucher Fund.

"It is true that there is not a lot of money in Pallada's funds, but the company has been performing very well and it's one of the best in the market," Churayeva said.

Pallada has several hundred individual clients and 41 institutional investors in its PIFs, which are now frozen. It has a total $34 million under management.

Its reputation has already suffered. The U.S. government filed a $120 million lawsuit in September 2000 against Harvard University and Hay and a fellow Harvard professor, Andrei Shleifer, alleging that they used their positions in the U.S. Agency for International Development program for personal gain.

The suit led to huge cash withdrawals from Pallada's funds, though no illegal connections between Hebert and the U.S. program were ever proved.