If mutual funds become the source of abuses, rather than the antidote, investor confidence is undermined everywhere.
It's not shocking that money companies will do just about anything for money. For investors, the problem arises when they care more about theirs than yours.
Consider the e-mail discussions this spring at Janus Capital Group, the big mutual fund outfit that manages about $150 billion in assets.
Executives were debating whether to skirt the corporate rules and let a hedge fund operator use its mutual funds to time the market. Many fund companies prohibit the practice and go to great lengths to prevent it, because it drives up costs for long-term shareholders.
But Janus -- along with others, it turns out -- was considering a way to let the firm, Canary Capital Partners, pull off the trades with its blessing.
A Janus exec was cautious: "I would feel more comfortable not accepting this type of business because it's too difficult to monitor/enforce and it is very disruptive."
But then the writer retreated: "Obviously, [it's] your call from the sales side."
Oh, really, it's up to the sales guys?
I naively thought that Janus was looking out for its mutual fund investors first. That's how the industry describes its one and only commandment.
A Janus official clarified the situation a week later in a follow-up e-mail: "I have no interest in building a business around market timers, but at the same time I do not want to turn away $10-20M!"
Twenty million dollars is a good piece of change, but not for a company the size of Janus and not for the risks involved. Since the e-mails and other details were made public this month, Janus' stock price has dropped 18 percent.
Nearly $800 million in market value has been wiped out.
It's hard to put a price on credibility, especially in a business based on trust, but that sounds about right to me.
Janus is one of four mutual fund operators that were identified as partners in schemes with Canary Capital. Banc One and Strong funds may have had similar trading arrangements.
And Bank of America may have gone further, allowing Canary to buy fund shares at the closing price hours after the market closed. Unlike other investors, Canary could react to late news and rack up profits the next day, taking money that should have belonged to regular investors.
Eliot Spitzer, the New York attorney general who uncovered the abuses, compared them with "betting on a horse race after the horses have crossed the finish line."
Spitzer released the Janus e-mails and other evidence when he announced a $40 million settlement with Canary Capital on Sept. 3. The investigation into the mutual fund industry is continuing, he said, and the full extent of the fraud is not yet known.
"But one thing is clear," Spitzer said in a statement, "the mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system."
In some ways, this development is as troubling as Enron's debacle. Enron's fake accounting was lethal for workers and investors, but its collateral damage was limited.
Mutual funds are supposed to be a cure for such rogue agents. They typically hold stock in dozens of companies, providing enough diversification to absorb the meltdown of a few bad players.
If mutual funds become the source of abuses, rather than the antidote, investor confidence is undermined everywhere.
About 95 million Americans hold mutual funds, and their assets, approaching $7 trillion, have grown sixfold since 1990.
Spitzer estimates that mutual fund frauds could cost shareholders billions of dollars a year.
Fortunately, he's on the case. Last year, he rattled Wall Street after he went after firms that used their analyst coverage to win investment banking business.
The specifics were different, but the central theme was the same: Executives sold out their customers for their own financial gain.
Mutual fund companies are holding their collective breath, worried that Spitzer will find more abuses. Then investors may begin to flee.
Morningstar, the fund-rating company, has already told readers to stay away from the funds operated by Bank of America, Banc One, Janus and Strong.
"It's an issue of basic fairness," said Christine Benz, editor of Morningstar Fund Investor.
She urged investors to sell their holdings, unless they faced unusual taxes or charges, because many other fund shops have a long history of putting shareholders first.
Bank of America and Janus said they'll make up the losses that investors incurred from the schemes, but only Bank of America has actually begun firing executives who were involved.
That's just the start of fixing what's wrong here.
When the sales staff sets the agenda at a mutual fund company, the culture itself has to change.
http://www.dfw.com/mld/dfw/business/6847897.htm
It's not shocking that money companies will do just about anything for money. For investors, the problem arises when they care more about theirs than yours.
Consider the e-mail discussions this spring at Janus Capital Group, the big mutual fund outfit that manages about $150 billion in assets.
Executives were debating whether to skirt the corporate rules and let a hedge fund operator use its mutual funds to time the market. Many fund companies prohibit the practice and go to great lengths to prevent it, because it drives up costs for long-term shareholders.
But Janus -- along with others, it turns out -- was considering a way to let the firm, Canary Capital Partners, pull off the trades with its blessing.
A Janus exec was cautious: "I would feel more comfortable not accepting this type of business because it's too difficult to monitor/enforce and it is very disruptive."
But then the writer retreated: "Obviously, [it's] your call from the sales side."
Oh, really, it's up to the sales guys?
I naively thought that Janus was looking out for its mutual fund investors first. That's how the industry describes its one and only commandment.
A Janus official clarified the situation a week later in a follow-up e-mail: "I have no interest in building a business around market timers, but at the same time I do not want to turn away $10-20M!"
Twenty million dollars is a good piece of change, but not for a company the size of Janus and not for the risks involved. Since the e-mails and other details were made public this month, Janus' stock price has dropped 18 percent.
Nearly $800 million in market value has been wiped out.
It's hard to put a price on credibility, especially in a business based on trust, but that sounds about right to me.
Janus is one of four mutual fund operators that were identified as partners in schemes with Canary Capital. Banc One and Strong funds may have had similar trading arrangements.
And Bank of America may have gone further, allowing Canary to buy fund shares at the closing price hours after the market closed. Unlike other investors, Canary could react to late news and rack up profits the next day, taking money that should have belonged to regular investors.
Eliot Spitzer, the New York attorney general who uncovered the abuses, compared them with "betting on a horse race after the horses have crossed the finish line."
Spitzer released the Janus e-mails and other evidence when he announced a $40 million settlement with Canary Capital on Sept. 3. The investigation into the mutual fund industry is continuing, he said, and the full extent of the fraud is not yet known.
"But one thing is clear," Spitzer said in a statement, "the mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system."
In some ways, this development is as troubling as Enron's debacle. Enron's fake accounting was lethal for workers and investors, but its collateral damage was limited.
Mutual funds are supposed to be a cure for such rogue agents. They typically hold stock in dozens of companies, providing enough diversification to absorb the meltdown of a few bad players.
If mutual funds become the source of abuses, rather than the antidote, investor confidence is undermined everywhere.
About 95 million Americans hold mutual funds, and their assets, approaching $7 trillion, have grown sixfold since 1990.
Spitzer estimates that mutual fund frauds could cost shareholders billions of dollars a year.
Fortunately, he's on the case. Last year, he rattled Wall Street after he went after firms that used their analyst coverage to win investment banking business.
The specifics were different, but the central theme was the same: Executives sold out their customers for their own financial gain.
Mutual fund companies are holding their collective breath, worried that Spitzer will find more abuses. Then investors may begin to flee.
Morningstar, the fund-rating company, has already told readers to stay away from the funds operated by Bank of America, Banc One, Janus and Strong.
"It's an issue of basic fairness," said Christine Benz, editor of Morningstar Fund Investor.
She urged investors to sell their holdings, unless they faced unusual taxes or charges, because many other fund shops have a long history of putting shareholders first.
Bank of America and Janus said they'll make up the losses that investors incurred from the schemes, but only Bank of America has actually begun firing executives who were involved.
That's just the start of fixing what's wrong here.
When the sales staff sets the agenda at a mutual fund company, the culture itself has to change.
http://www.dfw.com/mld/dfw/business/6847897.htm
