Spring Break
Mutual Funds Rocked by Corporate Scandal
Nachshon Block
Issue date: 11/26/03 Section: Exchange
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Although until recently, the trillion-dollar mutual fund industry had largely escaped the kind of scandal that plagued corporate America over the last three years, New York State Attorney General Elliot Spitzer recently exposed impropriety in even that industry. The Attorney General's findings in early September left the public's trust in mutual fund stability irrevocably tarnished.
Mutual funds are used by investors to pool their money in order to invest in stocks, bonds and other accounts. Many investments that would be out of reach for the average investor due to high buy-in costs are well within the reach of a mutual fund. Investors prefer mutual funds to diversify portfolios and thus avoid an abundance of eggs in one basket. Thus, believers in the stock market's potential -- whether generally or particular to a business sector -- need not rely on one particular stock's success to profit. Instead, they might invest in a mutual fund, which in turn invests in a large collection of stocks. These stocks might derive from one sector (bio-tech, cyclical stocks, health, etc.), or they might attend to market capitalization (small cap, mid-cap, etc.).
"Mutual funds offer broad diversification, professional investment management, flexibility and liquidity, often at a very low cost," says Michelle Smith, managing director of the Mutual Fund Education Alliance. "Mutual funds make it possible for anyone to participate in the success of the financial markets."
Most consider mutual funds much safer investments than traditional stocks, for those precise reasons.
On September 3, Mr. Spitzer brought charges against four financial institutions with mutual fund offerings: Bank of America, Bank One Group, Janus Capital and Strong Capital. He would soon levy additional charges against such investment giants as Morgan Stanley, Charles Schwab, Prudential Wachovia, Alliance Capital and American Express, among others.
He charged that some larger investors gained an unfair advantage by trading in and out of their mutual funds in an illegal manner. The special treatment afforded to these privileged investors (usually managers of hedge funds, a type of investment partnership for high net-worth investors) allowed them to trade after standard (and legal) 4 p.m. cutoff point for mutual fund trading. This illegal behavior allowed selected investors to capitalize on late developing news stories that would otherwise affect the value of the fund's portfolio the next business day. Mr. Spitzer explained that they were "betting today on yesterday's horse races."
Mutual funds are used by investors to pool their money in order to invest in stocks, bonds and other accounts. Many investments that would be out of reach for the average investor due to high buy-in costs are well within the reach of a mutual fund. Investors prefer mutual funds to diversify portfolios and thus avoid an abundance of eggs in one basket. Thus, believers in the stock market's potential -- whether generally or particular to a business sector -- need not rely on one particular stock's success to profit. Instead, they might invest in a mutual fund, which in turn invests in a large collection of stocks. These stocks might derive from one sector (bio-tech, cyclical stocks, health, etc.), or they might attend to market capitalization (small cap, mid-cap, etc.).
"Mutual funds offer broad diversification, professional investment management, flexibility and liquidity, often at a very low cost," says Michelle Smith, managing director of the Mutual Fund Education Alliance. "Mutual funds make it possible for anyone to participate in the success of the financial markets."
Most consider mutual funds much safer investments than traditional stocks, for those precise reasons.
On September 3, Mr. Spitzer brought charges against four financial institutions with mutual fund offerings: Bank of America, Bank One Group, Janus Capital and Strong Capital. He would soon levy additional charges against such investment giants as Morgan Stanley, Charles Schwab, Prudential Wachovia, Alliance Capital and American Express, among others.
He charged that some larger investors gained an unfair advantage by trading in and out of their mutual funds in an illegal manner. The special treatment afforded to these privileged investors (usually managers of hedge funds, a type of investment partnership for high net-worth investors) allowed them to trade after standard (and legal) 4 p.m. cutoff point for mutual fund trading. This illegal behavior allowed selected investors to capitalize on late developing news stories that would otherwise affect the value of the fund's portfolio the next business day. Mr. Spitzer explained that they were "betting today on yesterday's horse races."
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