Visit Your Local PBS Station PBS Home PBS Home Programs A-Z TV Schedules Watch Video Donate Shop PBS Search PBS
NOW Home Page
Home
Politics & Economy
Science & Health
Arts & Culture
Society & Community
Discussion
TV Schedule
Newsletter
For Educators
Archive
Topic Index
Search:
American flag
12.12.03
Politics and Economy:
Corporate Scandals
More on This Story:
Mutual Funds

New York Attorney General Eliot Spitzer, who made legal history with his Wall Street lawsuits and $1.4 billion resulting settlement last year, has turned his attention to the mutual fund industry. The investigation pays special attention to practices called "late trading" and "market timing." (See below.) In early September 2003, Spitzer announced that one hedge fund under investigation, Canary Capital Partners, LLC, had agreed to make restitution $30 million in illegal profits generated from unlawful trading and pay a $10 million penalty. In the first week of October 2003, Bank of America said it would pay back holders of any fund affected by such practices.

Throughout November and into December further suits have been filed against additional mutual fund providers, including one in Dallas against Mutuals.com and several by New York Attorney General Spizter. On December 9, 2003, a former executive at Security Trust pleaded guilty in an illegal mutual fund trading case brought by Attorney General Spizter and the SEC just two weeks before.

The effect of the scandal on the small investor is yet to be determined. In his October 6, 2003 column in THE WASHINGTON POST, financial writer Allan Sloan stated that the "mutual fund machinations may be the most troubling of recent scandals." On October 8, 2003, FORBES ran a Reuters article entitled "Investors may dodge much of mutual fund fallout," which suggested that individual investors would probably see no noticeable changes, positive or negative, as a result from the scandal and its resolution.

What is sure is that the story isn't over for investors or institutions. Attorney General Spitzer and the Securities and Exchange Commission (SEC) are continuing their probe. According to financial market tracker AMG Data Service, since the scandal broke the weekly inflow to mutual funds has dropped from $4.9 billion to $2.2 billion, perhaps indicating investor wariness. In addition, worries that some mutual fund advertising been misleading to investors has led the SEC to implement new rules for the industry.


MUTUAL FUND INDUSTRY

According to the trade association Mutual Fund Education Alliance:

A mutual fund is a company that pools the money of many investors — its shareholders — to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio — entitled to any profits when the securities are sold, but subject to any losses in value as well.
More than 80 million people, or one out of every two households in America, invests in mutual funds, with over $6 trillion invested. FORBES magazine estimates the mutual fund business at nearly $7 billion a year.

PRACTICES UNDER INVESTIGATION

Late Trading

Late trading is placing a buy order for a mutual fund after 4 p.m. ET and getting it at that day's closing net asset value. Late trading is an illegal practice which lets an investor benefit from events that happen after the closing bell — changes which aren't reflected in the stock's closing price.

Market Timing

Market timing involves the short-term trading in and out of a fund. Market timing is a legal practice unless prohibited or discouraged by a mutual fund's prospectus. Watchdogs worry that since fund managers have to pay commissions on buying and selling, this practice could lead to charges which could effect investor returns.


THE NEW YORK ATTORNEY GENERAL'S CASE

When New York Attorney General Eliot Spitzer announced the first settlement coming out of his investigation of the mutual fund industry he stated:

The full extent of this complicated fraud is not yet known, but one thing is clear: The mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system. They make illegal after-hours trades and improperly exploit market swings in ways that harm ordinary long-term investors.
Since Spitzer announced the settlement with Canary Capital Partners in September 2003, in which the company will make restitution $30 million in illegal profits generated from unlawful trading and pay a $10 million penalty there have been further developments. On October 7, 2003 two of the country's biggest mutual funds, Fidelity Investments and Franklin Resources, acknowledged that they had been subpoenas from Attorney General Spitzer's office.

In addition, one trader from Millennium Partners has been convicted for late trading as a result of the probe, and several other firms, including Merrill Lynch, Alliance Capital Management and Prudential Securities have fired personnel.

Read the full case: The New York State Investigation Reveals Mutual Fund Fraud Canary Capital Partners, Ltd.

MUTUAL FUND ADVERTISING

Responding to concerns that individual investors are buying into mutual funds as a result of misleading print and television advertising, the Securities and Exchange Commission is phasing in new guidelines for advertising.

  • Funds will have to make information on their current performance available either through a Web site or a toll-free number. Previously, the funds could chose which return period they chose to highlight in ads.
  • Fund advertisements will be required to illustrate risks as well as returns. New ads must acknowledge that the funds can go down as well as up and clearly state that past performance is not a guarantee of future results.
  • Any advertising material will also have to explain clearly the fundís investment objective, growth or income.
    Fund ads will be required to explain charges and expenses, including sales charges, management fees and exchange fees clearly.

Read the new rules: Amendments to Investment Company Advertising Rules, SEC misleading advertisements

FURTHER INFORMATION

NOW's politics and economy resources
Mutual Fund Investors Center
WALL STREET WEEK WITH FORTUNE: MUTUAL FUNDS
USATODAY: MUTUAL FUNDS

Sources: THE NEW YORK TIMES; THE SEATTLE TIMES; FORBES; THE WASHINGTON POST; THE WALL STREET JOURNAL; USATODAY; MARKETPLACE.

Related Stories:

about feedback pledge © Public Affairs Television. All rights reserved.
go to the full archive