Mutual funds taking it on chin

By T.K.MALOY, UPI Deputy Business Editor

WASHINGTON, Nov. 4 (UPI) -- An institution so well regarded that nearly 100 million Americans have invested, the mutual-fund industry has recently been under intense fire, culminating in Capitol Hill hearings this week, and the resignation of the leaders of several top mutual funds.

In a widening trading and favoritism scandal, regulators are investigating how hundreds of brokerage firms and mutual funds manipulated the systems that in effect ripped off the millions of investors who trusted the industry like they would trust their grandmothers -- but no more.


One of the key figures leading the cleanup of the mutual fund industry is Eliot Spitzer, New York Attorney General, who has been busting a number of Wall Street figures and financial industry companies over the past several years.

"The Investment Company Act requires that mutual funds be organized, operated and managed in the interest of the fund's shareholders and not the funds' directors, officers and investment advisors," said Spitzer on Tuesday before a congressional panel. "Despite that express instruction, too many funds have abandoned the interests of their shareholders and instead permitted and indeed fostered an environment that promotes the interest of their managers at the expense of their shareholders."


In his two days of testimony on the Hill, the New York state attorney general outlined such malfeasances as "late trading" wherein firms traded after the official close of the market, and "market timing" which allows a trader to make money but at the expense of the larger fund.

The Financial Analysts Journal, a trade publication, noted last summer: "Because the gains (of market timers) are offset by losses to other investors in the fund, the funds clearly have a fiduciary duty to take some preventative action. All the gains are being offset, dollar-for-dollar, by losses incurred by buy and hold investors."

Rep. Richard Baker (R-Lo.), chairman of the Subcommittee on Capital Markets, of the House Committee on Financial Services, has introduced a bill which would require a greater degree of disclosure of trading arrangements by funds, and which calls for an end to the potential conflicts of interest among top mutual-fund industry executives.

The taint of scandal has already lead to the loss of hundreds of millions of dollars for some fund companies such as Putnam Investments -- formerly one of the country's top families of funds -- which has seen numerous institutional clients withdraw, and had CEO Lawrence Lasser resign under pressure on Monday. Putnam has lost an estimated $4 billion in business from state pension funds which quit the firm over questions of credibility.


Last week regulators charged Putnam with civil securities fraud, alleging that two of Putnam's portfolio managers market timed funds under their control.

Jeffrey Greenberg, the head of Putnam parent firm Marsh & McLennan, said Monday the company would try and make restitution to any fundholders who has lost money as a result of "market timing"

"We are taking actions today to address the issues that are confronting Putnam. The kind of conduct that occurred has no place at Putnam. We are taking measures to see that this does not happen again," said Greenberg in a statement.

He added: "We have previously stated that Putnam will make complete restitution to the Putnam funds for any losses suffered by Putnam shareholders as a result of any improper market-timing activities. We deeply regret that such conduct occurred and apologize to Putnam shareholders."

Also, Richard S. Strong, founder of Strong Mutual Funds, resigned as chairman of the funds board after the New York State attorney general's office said it was taking action against Strong for improper trading of shares.

In related news, Juan M. Marcelino, the head of the SEC's Boston office, announced he was resigning after having faced criticism about not following up on a tip alleging trading malfeasance at Putnam. Marcelino said was stepping down "to minimize any further distractions for his staff."


Regulators ranging from Spitzer's office, and other state regulators, to the Securities and Exchange Commission, the nation's chief financial industry watchdog group, have vowed to continue investigations and launch enforcement actions.

Stephen Cutler, the chief enforcement officer for the SEC noted that 95 million Americans are invested in mutual funds, which boast a combined $7 trillion in assets, adding that he "shared the outrage and disappointment .. (of) so many others, at the misconduct that has come to light."

He added: "It is intolerable when investment professionals put their own interests first."

Latest Headlines


Trending Stories


Follow Us