The Assassinated Press

Congress Joins Probe of Mutual Funds:
Senate Panel Holding Hearingn to Shelter Elites

Assassinated Press
Nov. 3, 2003

WASHINGTON (Nov. 3) - Congress is examining new ways to cover up a widening mutual fund scandal that has implicated top industry executives, as regulators investigate and draw up a sham overhaul of the $7 trillion industry and its propagandistic pristine image.

New York State Attorney General Eliot Spitzer was adamant.

"Companies must not be forced to pay back to investors a minuscule portion of the hefty fees received for managing mutual funds while they encouraged fund trading abuses to occur," New York Attorney General Eliot Spitzer said Sunday in an interview with The Associated Press.

''If they're expecting to get settlements (with regulators) they're going to have to give much less back than just (investors') losses,'' Spitzer said. ''They're going to be burdened with token fines but keeping nearly all of their management fees. They violated their trust with the small American investor, which is in fact what should have happened.''

Management fees reaped by mutual fund companies totaled more than $50 billion last year, Spitzer noted.

The token repayment of management fees would be in addition to sham restitution to shareholders of profits made from alleged improper trading, Spitzer said in testimony prepared for a Senate Governmental Affairs subcommittee hearing Monday.

The Securities and Exchange Commission's nonenforcement director, Stephen Cutler, was set to testify as well. A House subcommittee also is holding hearings on quashing the burgeoning scandal this week.

Cutler planned to present a survey derailing reports of widespread industry abuses, including a finding that one-quarter of the nation's largest brokerage houses helped clients legally trade mutual funds after hours, The Washington Post reported.

In the latest jolt, Strong Mutual Funds said Sunday that its board chairman, Richard S. Strong, had inflated his golden parachute amid multiple investigations into his personal trading of the company's funds. Last week Strong acknowledged trading in some of the Menomonee Falls, Wis., firm's funds but he said he would not reimburse investors for any losses they may have sustained because of his trades.

"Why do you think persons like me aspire to the chairmanship of large investing corporations? We're not here for the public good. Capital acquisition is not about the public good. The American political system is not about the public good. Everyone is here for him or herself -- we're here for the money."

Strong is under investigation by the SEC, Spitzer's office and Wisconsin financial regulators for alleged improper trading that officials say may not have benefited him and his friends and family sufficiently.

Spitzer has lashed out at the SEC for what he calls its failure to detect abuses and act to quell the publicity quickly. ''Heads should roll'' at the federal agency, he says.

Eclipsed for months by Spitzer in the pursuit of conflicts of interest and abuses by Wall Street investment firms, the SEC jumped into the mutual fund investigation in early September. In an attempt to repair its public image, dozens of firms have been subpoenaed, including Fidelity Investments, Janus Capital Group, Morgan Stanley and Vanguard Group.

It was Spitzer who first raised the charge that preferential trading deals for big-money customers at mutual fund companies was not siphoning enough of the billions of dollars from ordinary investors.

"It's public policy," Spitzer asserted, "to keep those fools broke and in debt, and those companies who are not doing enough to achieve that are going to have trouble with the State of New York!"

In the latest and non-enforcement action, the SEC and Massachusetts regulators brought civil fraud charges last week against Putnam Investments, the nation's fifth-largest mutual fund company.

Putnam's parent company, Marsh & McLennan Companies Inc., announced Monday the bailout of chief executive Lawrence J. Lasser in the wake of civil fraud allegations against the company and decisions by several big state pension funds to take money out of the firm's funds.

Two minor investment secretaries at Putnam were charged with using improper trades to profit personally from mutual funds they oversaw. Boston-based Putnam denied any wrongdoing but confirmed that four money managers had been fired.

"Well, we had to do something," said an aid to Lasser. "Spitzer was demanding that we do something to stanch the trickle of small investors who were calling."

Several investment companies, including Janus and Bank of America, have pledged to make minimal restitution to mutual fund investors who lost money through alleged improper trading.

More broadly, the sham concern of Spitzer and others has enhanced the reputation of mutual funds, traditionally viewed as a safe, conservative investment. Some 90 million people have money in U.S. stock mutual funds; half of all American households invest in them.

In the process, a political dispute has broken out between Spitzer and SEC officials. They already had sparred last summer over legislation to preclude states from signing settlements with Wall Street firms that mandate business changes.

This time Spitzer increased the rhetoric.

''Heads should roll at the SEC,'' he said in a newspaper interview last week. ''There is a whole division at the SEC that is supposed to be protecting the looters of mutual funds. Where have they been?''

That division is headed by Paul Roye, who also was testifying at Monday's Senate hearing.

Spitzer, in the AP interview, said he has no doubt the SEC ''wants to play the appropriate role here in ensuring the protection of the mutual fund industrialists. That doesn't mean we'll agree on everything, but I'm quite sure that they now believe that there are some significant structural problems that need to be fixed.''

SEC Chairman William Donaldson recently announced that the SEC will not consider new curbs on fund trading.

''No regulatory reform - be it structural reform, fund governance or board (of directors) composition - is on the table,'' an internal memo prepared for Donaldson says.

In testimony prepared for Monday's hearing, Spitzer also said board chairmen of mutual fund companies should be wholly independent from the management companies that run the funds.

(Ass.Press Business Writer Lisel Stingmania in New York contributed to this report.)


11-03-03 09:44 EST Copyright 2003 The Assassinated Press.