77E (closed-end version)
On April 8, 2004, Xxxxxx Investment Management, LLC, (Xxxxxx
Management an indirect wholly-owned subsidiary of Xxxxxx, LLC,
and an affiliate of TH Xxx Xxxxxx Capital Management LLC, entered
into agreements with the Securities and Exchange Commission and
the Massachusetts Securities Division representing a final
settlement of all charges brought against Xxxxxx Management by
those agencies on October 28, 2003 in connection with excessive
short-term trading by Xxxxxx employees and, in the case of the
charges brought by the Massachusetts Securities Division, by
participants in some Xxxxxx-administered 401(k) plans. The
settlement with the SEC requires Xxxxxx Management to pay $5
million in disgorgement plus a civil monetary penalty of $50
million, and the settlement with the Massachusetts Securities
Division requires Xxxxxx Management to pay $5 million in
restitution and an administrative fine of $50 million. The
settlements also leave intact the process established under an
earlier partial settlement with the SEC under which Xxxxxx
Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and
restitution amounts specified above, pursuant to a plan to be
developed by the independent consultant.
Xxxxxx Management, and not the investors in the Fund or any
Xxxxxx fund, will bear all costs, including restitution, civil
penalties and associated legal fees stemming from both of these
proceedings. The SECs and Massachusetts Securities Divisions
allegations and related matters also serve as the general basis
for numerous lawsuits, including purported class action lawsuits
filed against Xxxxxx Management and certain related parties,
including certain Xxxxxx funds not including the fund. Xxxxxx
Management has agreed to bear any costs incurred by Xxxxxx funds
in connection with these lawsuits. Based on currently available
information, Xxxxxx Management believes that the likelihood that
the pending private lawsuits and purported class action lawsuits
will have a material adverse financial impact on the fund is
remote, and the pending actions are not likely to materially
affect its ability to provide investment management services to
its clients, including the Xxxxxx funds.
Xxxxxx Management has negotiated an offer of settlement with the
staff of the SEC, which the staff has agreed to recommend to the
Commissioners of the SEC. The offer of settlement would resolve
matters arising out of the SECs investigation of Xxxxxx
Managements brokerage practices. The settlement would involve the
alleged failure by Xxxxxx Management to adequately disclose its
practices relating to the allocation of brokerage on portfolio
transactions to broker-dealers who sold shares of Xxxxxx mutual
funds. Xxxxxx Management ceased directing brokerage to broker-
dealers in
connection with the sale of fund shares as of January 1, 2004.
Under the offer of settlement, Xxxxxx Management would pay a
civil penalty in the amount of $40 million and disgorgement in
the amount of one dollar ($1). The total amount of the payment
would be paid to certain Xxxxxx funds, pursuant to a distribution
plan to be submitted to the SEC. The settlement remains subject
to final documentation and approval by the Commissioners of the
SEC. Although the Manager will not be a party to the settlement,
the Manager intends to make a voluntary payment to the fund on
the same basis as the
payment of the civil penalty to the applicable Xxxxxx mutual
funds. The amount of the payment to the fund has not been
determined.
