Nov. 5 (Bloomberg) -- Value Line Inc., advertised as “the most trusted name in investment research,” replaced its leader and agreed to pay $43 million to settle U.S. claims that the firm charged nine of its own mutual funds for “phantom” brokerage services.

Chief Executive Officer Jean Buttner, 74, stepped down and will pay a $1 million fine, according to a company filing and a statement from the Securities and Exchange Commission yesterday. Former Chief Compliance Officer David Henigson, 52, also resigned and will pay $250,000. Both were barred from the industry or serving as a company officer, the SEC said.

“Value Line misappropriated millions of dollars from the mutual funds they managed by artificially allocating fund trades and then charging the funds for phantom brokerage services,” Robert Khuzami, head of the SEC’s enforcement division, said in a statement. “Such blatant wrongdoing will not be tolerated.”

The firm, described on its Web site as “synonymous with trust, reliability and objectivity,” reaped more than $24 million from 1986 to 2004 in brokerage fees on trades for Value Line mutual funds that were funneled through its affiliated broker, Value Line Securities Inc., the SEC said. The unit didn’t perform bona fide services on the trades, according to the SEC, which called the practice “fraudulent.”

Buttner, a resident of Westport, Connecticut, and Henigson, who lives in Riverside, Connecticut, didn’t admit or deny the claims, nor did their New York-based firm, the agency said.

‘Reputational Question’

“The asset-management business has not grown as the fund industry has grown,” said Geoff Bobroff, a mutual-fund consultant. “It’s possible that they may now need to sell the funds because of the reputational question.”

Howard Brecher, 56, chief legal officer for Value Line, was named to the additional post of acting chairman and chief executive officer, the 78-year-old company said in a regulatory filing.

Buttner, who the SEC said took over as Value Line CEO in 1988, allegedly directed a “commission recapture program” that was created by her predecessor, in which the company sent mutual fund trades to outside brokers in exchange for a lower commission rate. Instead of passing the discount to the funds, the firm kept the rebate and misled fund shareholders and independent directors about the payments, the SEC said. Nine equity mutual funds were involved, the company said.

Value Line Revenue

“During this period the affiliated brokerage revenue comprised less than 1 1/2 percent of Value Line Inc.’s total revenue,” the company said in a statement. “Value Line management ended the affiliated brokerage practice in 2004.”

Value Line agreed to pay $24 million in disgorgement, $9.5 million in interest and a $10 million penalty, the SEC said. The settlement is almost twice as much as the company earned in each of the past two years.

William McBride, a spokesman for Value Line at Kreab Gavin Anderson in New York, and Rick Prins, a lawyer representing Buttner, declined to comment. A phone call after work hours to Seth Taube, Henigson’s lawyer, wasn’t returned.

The company said in a Sept. 11 filing that it had set aside $48 million to settle the SEC’s allegations.

Buttner, who was chairman and president of Value Line Securities until February, effectively controls about 87 percent of outstanding voting stock of Value Line Inc., the SEC said. She took over in 1987 when her father, company founder Arnold Bernhard, died and left her in charge.

The company built its reputation by providing independent stock evaluations and recommendations, which it sold by subscription to individuals and other investors. The flagship Value Line Investment Survey covers about 1,700 stocks, according to the Web site.

Challenge From Morningstar

In 1986, Morningstar Inc. launched a newsletter of charts and analysis that competed with Value Line. Buttner told Newsweek in 1994 she was “shocked” that Morningstar had copied Value Line’s business model.

Value Line stock has declined about 10 percent this year, compared with a 16 percent gain for the Standard & Poor’s 500 Index. Value Line fell 37 cents to $31 yesterday in Nasdaq Stock Market trading.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net.

Last Updated: November 5, 2009 01:22 EST