U.S. mutual fund firm Alliance Capital Management LP will pay a record US$600 million in fines and restitution in a coordinated settlement with the Securities and Exchange Commission and New York state to settle charges that it defrauded investors by allowing market timing in some of its mutual funds.

As part of its settlement with the SEC, Alliance will pay US$250 million to fund shareholders who were damaged by the special market-timing deals Alliance is alleged to have had with certain large investors. All of the settlement funds, including a US$100 million penalty, will be distributed to Alliance fund investors harmed by market timing activity, the SEC said.

In conjunction with the SEC agreement, the office of New York Attorney General Eliot Spitzer announced a settlement with Alliance, which includes a 20% cut in mutual-fund fees and a freeze on those fees for at least five years. Mr. Spitzer estimates the fee reduction is valued at US$70 million per year, or US$350 million over the five-year period.

Alliance won’t be required to reduce fees for its mutual-fund investors under its SEC agreement, but it will have to undertake reforms to prevent future wrongdoing, the SEC said.

Alliance settled without admitting or denying the SEC’s claims.

SEC enforcement division director Stephen Cutler said the size of the payment — the largest ever by a mutual-fund adviser — guarantees “full compensation to investors” harmed by Alliance’s market-timing arrangements.