On Wednesday, November 4th, Value Line Inc. settled with the Securities and Exchange Commission over charges that they made more than $24 million from false mutual fund trades between Value Line’s funds and their affiliated broker dealer, Value Line Securities Inc. Value Line ultimately ended up settling for around $43 million, a figure that includes the $24 million in disgorgement to defrauded fund investors, $9.5 million in interest and $10 million in penalties. The settlement also bans the former chief compliance officer David Henigson and former CEO Jean Bernhard Buttner from working in the industry again.
The settlement is certainly a blow to Value Line but to say the firm is finished is almost certainly premature. In September of this year, Value Line claimed to have set aside $48 million in reserve in anticipation for this settlement and Buttner also sent a memo to employees on September 11th of this year stating, “We remain a strong company and have the resources to cover these costs.” Some clients see worth in Value line as well. Dennis Stearn of Stearns Financial Services Group says he won’t stop using them now, adding “We’ve used them for over 25 years and they’re still a valuable resource.”
Despite the company’s ability to weather the initial blow, there are other factors which will be called into question as a result of the settlement. Value Line’s website proudly proclaims “Welcome to The Most Trusted name in Investment Research” at the very top. In light of recent events, this statement now seems suspect.
An article on Bloomberg brings up other problems which the company is currently facing. Since Buttner took over in 1988, Value Line’s stock gained 18%, or 1.8% annually, compared with a 319% gain in the S&P 500 Index. The company also posted a net loss of $31.58 million in the most recent quarterly report (the three months before July 31st). A fund consultant, Geoff Bobroff, even went so far as to say that since Buttner’s father passed away, his sense was that Value Line had no visionary. In that regard, perhaps it is a boon for the company that the terms of the settlement banned Buttner from working in the industry.
Ultimately, Value Line has agreed to pay the settlement without admitting or denying guilt over the charges brought against them. Because of that, we can never be certain exactly what they did or didn’t do and what their motives may have been. Logically, it would make sense that if they were innocent of any wrongdoing they would not have agreed to pay $43 million. Assuming the allegations are true, perhaps their problems generating increases in stock price led them to defraud their investors in hopes of keeping pace with their competitors. Whether or not Value Line is guilty as charged, stories such as this serve to reinforce a grim pessimism about the moral quality of our financial institutions.