For the third morning in a row Morningstar is prominent in the headlines, but this time it is likely unhappy with the coverage. The Wall Street Journal is reporting that the fund tracker is in hot water with the SEC because it failed to correct inaccurate performance data on a fund. The failure to fix the data could lead to civil charges being filed, the paper adds.

The paper's report is based on an interview with Joseph Mansueto, Morningstar's founder and chairman. He reportedly also said that Morningstar officials are talking with SEC staff to find a way to settle the case.

The case is an interesting one in that the SEC has no jurisdiction over publishers. It is basing its claim on allegations that by recklessly handling data Morningstar could have deceived investors. That argument seems a stretch, but the SEC may have greater leverage in this case since Morningstar remains in the midst of the IPO process and is dependent on the SEC for the offering to go off as planned.

The error happened in data Morningstar published about the little-known Rock Canyon Top Flight stock fund. Morningstar miscalculated the impact of a capital gains distribution the fund made and as a result overstated its performance. The fund tracker then took 13 days to correct the performance data on its Web site after it was informed of its error. During that time (March 12 to March 25) the fund was listed as the top performer in its peer group.

Still, the error may not have influenced any investors, a fact that raises questions about the SEC's high-handed approach. The SEC contacted the fund's manager in late March while the error was still on the Morningstar Web site, and the manager told it that no new money had come into the fund since Morningstar made the error. That fact would seemingly raise a question about whether Morningstar had deceived any investors.

Mansueto also told the paper that though the SEC first contacted Morningstar in April, it was not until the firm filed its S-1 that it was clear the fund tracker was the target of the SEC probe.  

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