(FORTUNE Magazine) – Janus Capital, one of the first mutual fund companies implicated in the mushrooming market-timing scandals, recently issued the results of its internal investigation and voluntarily pledged to pony up $31.5 million to customers in an aggressive attempt at damage control. What the once highflying Denver company didn't reveal, however, is that one of its top portfolio managers opened the door to the secret trading abuses.

Janus's largest rapid-trading relationship, FORTUNE has learned, began in late 2001, after Warren Lammert, then manager of the giant Janus Mercury fund, introduced a personal friend to colleagues at the company's headquarters. That friend was Gregory Trautman, CEO of a New York brokerage named Trautman Wasserman, who had worked closely with Lammert on efforts to fight epilepsy. Both have young daughters with the disorder.

After Trautman's visit to Denver, FORTUNE is told, his firm was allowed to engage in extensive market-timing of Janus funds (including Mercury), mostly on behalf of a few large hedge-fund clients. Sources tell FORTUNE that Trautman's activities both predated and dwarfed those of Canary Capital, a New Jersey hedge fund whose arrangements with Janus and other fund companies resulted in a $40 million September settlement and publicly launched the scandal.

Precisely when Lammert knew of his friend's activities is a matter of some debate. One view is that he was aware of Trautman's intentions from the outset, and that even if he weren't, it would be virtually impossible for him to remain unaware for long about such substantial rapid trading in his own fund. According to another version of events, Lammert didn't know Trautman Wasserman was market-timing Mercury until about a year after the initial meeting. In either case, the frequent trading continued for months, with Lammert's knowledge, until his departure from Janus in March 2003--and indeed, even afterward.

Word of Lammert's role offers the first evidence of explicit knowledge by a portfolio manager at Janus--and suggests that awareness of such arrangements was more widespread than Janus previously indicated. (Only one Janus marketing executive implicated in the Canary Capital case has been named.)

The internal investigation by Ernst & Young revealed that Janus executives had struck ten special arrangements with market timers. Frequent trading in Janus funds had, by Janus's count, netted the timers $22.8 million. In its fund prospectus and public statements Janus has consistently said it opposes such short-term trading, which, though legal, costs other investors and can disrupt portfolio management.

Trautman, one source told FORTUNE, was Janus's "alpha timer." In its recent disclosure Janus, without naming Trautman Wasserman, noted that the earliest of its ten market-timing arrangements began in November 2001 and accounted for "a substantial majority" of the rapid-fire trading across those ten relationships. Lammert, who now runs his own investment firm in Boston, declined comment on the matter.

Trautman, during a brief phone interview, noted that regulators are scrutinizing dozens of companies in the securities industry. "They've subpoenaed anyone who had any activity in the mutual fund business." He declined to discuss any allegations of trading abuses. "No comment would be appropriate,"said Trautman, "but I think Warren Lammert is a great guy."

Janus declined to make any additional comment.

Lammert, a Yale graduate who had served on Janus's executive investment committee, managed the aggressive Mercury fund from its 1993 inception. Its sizzling returns (96% in 1999) investing in high-growth stocks boosted assets to a peak of more than $13.5 billion. But the end of the boom market prompted huge losses and massive redemptions, reducing assets to $5.3 billion.

On Dec. 19, when Janus announced that it would pay the $31.5 million to "make amends" to fund investors, it acknowledged ongoing investigations by the SEC and the attorneys general of New York and Colorado. The company said it has conducted "preliminary discussions" with regulators to try to resolve matters and expects to face demands for "substantial civil penalties."

One thing is clear: Janus can look ahead to some costly looking back.

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