TOPICS > Politics

Mutual Fund Fraud

November 18, 2003 at 12:00 AM EDT


KWAME HOLMAN: The scandals in the mutual fund industry grow almost daily. To date, 11 firms that manage close to $1 trillion of investors’ money have been charged or are under investigation for securities fraud.

This morning, members of the Senate Banking Committee focused on how the Securities and Exchange Commission failed to detect fund managers who allowed insiders to trade after hours, siphoning potential stock profits from everyday investors. William Donaldson, chairman of the SEC, said the Commission did not foresee such schemes.

WILLIAM DONALDSON: For too long, the Commission has found itself in the position of reacting to market problems rather than anticipating them. There are countless reasons for this, not the least of which include historically lagging resources and structural and organizational roadblocks. The time for excuses has long passed.

KWAME HOLMAN: Committee Chairman Richard Shelby asked about a recent SEC action involving the scandals. The commission agreed to a settlement with Putnam Investments, a multibillion- dollar fund that had been charged with securities fraud.

SEN. RICHARD SHELBY: Is the Putnam settlement a model for the type of reforms that the SEC is seeking? Why did you do it so quickly rather than try to seek an industry-wide settlement?

WILLIAM DONALDSON: Well, we don’t think that we should use a bludgeon at this time to bring in a whole lot of other reforms that may pertain to the rest of the industry or may pertain to Putnam on this settlement. We thought the higher good, if you will, was bringing these charges to a conclusion and in so doing to hopefully begin to eliminate immediately the burdens that are currently being placed on Putnam Fund shareholders.

KWAME HOLMAN: In the New York Times yesterday, New York State Attorney General Eliot Spitzer criticized the SEC’s decision to settle the Putnam case. Spitzer wrote: “My office – while committed to working in the Securities and Exchange Commission in our investigation of the mutual fund industry – will not be party to settlements that fail to protect the interests of investors and let the industry off with little more than a slap on the wrist.” Donaldson defended the settlement in today’s Wall Street Journal, and in his opening statement to the Banking Committee.

WILLIAM DONALDSON: The criticism is misguided and misinformed and it obscures the settlement’s fundamental significance. First, we put in place a process for Putnam to make full restitution for investor losses associated with Putnam’s misconduct. Secondly, we required Putnam to admit its violations for purposes of seeking a penalty and other monetary relief– an important point. Third, we forced immediate tangible reforms at Putnam to protect investors from this day forward.

KWAME HOLMAN: Connecticut’s Christopher Dodd told Donaldson the public interest is not served when regulators are sniping at each other.

SEN. CHRISTOPHER DODD: Are there lines of communication? Is there anything… any effort being made? I mean just having competing op- ed pieces and so forth, I mean, I’m just worried about where this is going to take us — if you’re trying to fashion something here that makes sense.

WILLIAM DONALDSON: We’re doing everything in our power to work with the state regulators and that includes all of them. Unfortunately we can’t control what certain state regulators decide they want to say publicly. I believe that it’s very counterproductive.

KWAME HOLMAN: The committee’s top Democrat, Paul Sarbanes of Maryland, followed, saying if one regulator overlooks criminal activity, another one must step in.

SEN. PAUL SARBANES: If a vacuum exists, if a problem has developed, if investors are being abused, if the public perceives that the public interest is not being addressed, then whoever moves into that vacuum is going to be welcome.

KWAME HOLMAN: Donaldson responded that the fund companies that have committed wrongdoing will be punished and investors reimbursed. After Donaldson, the committee heard from mutual fund industry representatives who also said the mutual fund schemes were not on their radar.

SPOKESMAN: This obviously has been a wake-up call for all of us.

KWAME HOLMAN: Again Paul Sarbanes spoke up.

PAUL SARBANES: You sit at the top of the pyramid of your industries, and you’re telling us here today, “well, we didn’t know this was happening.”

SPOKESMAN: We’re trade association lobby groups. We don’t go out and inspect our members.

KWAME HOLMAN: Members of the Senate and House from both parties are backing legislation to overhaul the way the mutual fund industry operates, but action is not expected until next year. The Banking Committee will continue its hearings on the issue later this week.