The rich are finding ways to steal from YOUR mutual fund!

Sep 9 03:35 UTC 2003

Sept. 7, 2003, 7:28PM
Fund scandal threatens very foundation of investing
By SHANNON BUGGS
Copyright 2003 Houston Chronicle

BUY and hold. Own shares for the long haul. Only fools time the
market. All orders received after 4 p.m. pay the next day's price.

These are the mantras the mutual fund industry has taught investors
to say and believe.

Last week, investors learned some fund families have been living by a
very different rule: "Do as I say, not as I do."

Eliot Spitzer, New York's attorney general, revealed the hypocrisy
when he announced a settlement with a hedge fund that received
privileges not given to most other shareholders from four prominent
fund companies in exchange for investing money in the funds, which
generated fees for the companies.

The funds -- Bank of America, Janus Capital Group, Bank One Corp. and
Strong Capital Management -- gave Canary Capital Partners access to:

· Closing-bell prices on share purchases made hours after the market
closed, despite federal laws prohibiting such look-back pricing.

· Up-to-date information on the stocks the fund owned and in what
proportion, information that most funds steadfastly refuse to share
with their shareholders or the public.

· Fee exemptions, continued trading access or other privileges in
violation of the companies' own stated rules discouraging or banning
frequent traders from investing in their funds.

Canary agreed to pay $40 million to settle the charges without
admitting or denying wrongdoing. And Spitzer has not charged any of
the fund families with a crime.

But what he has uncovered so far raises the concern that the level
playing field most Americans seek in education, employment and
economic opportunities may just be a myth -- an ideal this country
will never attain.

Mutual funds are supposed to be the no-nonsense, safe and easy way to
achieve your financial dreams.

Want to send a child to college? Invest money each month in mutual
funds held in a state-sponsored college savings plan.

Want to retire early? Live on a smaller sum each month and put the
rest of your paycheck into mutual funds held in your
employer-sponsored retirement plan.

The mutual-fund industry convinced 95 million Americans to entrust it
with their savings and economic security because it promised we were
all playing the same game with the same rules.

The fund manager gave us the expertise and experience that we did not
have the time to gain on our own. The other shareholders gave us the
financial clout to buy large positions in stocks and bonds.

That gave the children and grandchildren of survivors of the
Depression the confidence to stop saving money in a mattress and start
investing their way to prosperity.

That's why it's a gut punch to middle-income America's stomach to
find out the companies that fashion themselves as the small-investor's
champions on Wall Street may be selling them out.

"A mutual fund that sets up two sets of rules is a travesty," says
George Ball, chairman of president of Sanders Morris Harris, a
Houston-based private investment bank. "That violates the whole spirit
of the industry."

If Spitzer's scrutiny digs up more hypocrisy, the ensuing scandal
could undermine investor confidence in the markets more than Enron's
collapse, Arthur Andersen's accounting shenanigans and the Wall Street
brokerage firms disingenuous stock research.

If that happens, Congress would be forced to take drastic steps to
rebuild investors' trust.

One step might be to revive and bulk up the Mutual Funds Integrity
and Fee Transparency Act, which passed the House Financial Services
Committee this year but wasn't introduced in the Senate.

The mutual fund industry lobbied hard against a provision that was
removed from the bill that would have required fund companies to
reveal how a fund's costs compare to index funds and the rest of its
peers.

Fees are a particularly contentious issue in the mutual fund
industry. It's common practice for some funds to pay higher commission
fees to brokerage firms that execute their trades in exchange for
research and other services.

Shareholders pay those higher costs, known as soft-dollar
arrangements, even though shareholders pay management fees with the
expectation that the fund managers research for themselves the stocks
and bonds they buy for the portfolios they manage.

Questions also have also been raised about why funds closed to
newcomers continue to charge fees that are supposed to be collected to
recoup some of the costs of attracting new investors. These 12b-1 fees
no longer just pay for advertising but have evolved into profit
generators for some funds.

Lawmakers also may consider adding provisions that ban market timers
from mutual funds not specifically set up to attract that kind of
investor. This practice lowers long-term investors' returns by forcing
fund managers to pay commission costs on the quick sales and to keep
cash on hand for redemptions, which means that money cannot be used in
other, more-profitable ways.

We all have too much at stake to let the ideal of a level playing
field remain a fantasy.

Shannon Buggs has completed the personal finance planning certificate
program at the University of Houston. While she invites comments and
column ideas, she cannot offer specific advice about individual
situations. E-mail her at shannon.buggs@chron.com or call
713-220-6834.

http://www.chron.com/cs/CDA/ssistory.mpl/business/2085334

response 2 of 36:

Sep 9 13:45 UTC 2003

I suspect there won't be as much public outcry over this as there was
over Enron.  It's a bit more abstract, and there's no group of people to
interview that has been completely wiped out.

response 4 of 36:

Sep 9 22:00 UTC 2003

If you want a diverse portfolio stick to ETF's (QQQ, SPY, DIA, IWM, etc..)
you also don't have to worry about MF managers churning the fund.

response 6 of 36:

Sep 11 03:47 UTC 2003

I remember hearing on the radio today that in the 1970s, CEOs made on
average 100 times what the average worker made.  Today it's either 500 times
or 1000 times, depending on which study you look at.  Studies have also
found that corporate performance and executive salaries are not correlated
in any way.

response 8 of 36:

Sep 11 19:38 UTC 2003

Absolutely.  The question is, what can be done about it?

response 10 of 36:

Sep 12 00:08 UTC 2003

Au contraire.  Does not the increasing concentration of individual 
stockholder interests into mutual funds and pension funds put more power 
into the hands of the professional managers whose full-time jobs are 
handling investements?  For example, just look at the pressure that 
CALPERS has brought to bear on companies in which it holds major 
interests.

response 12 of 36:

Sep 12 13:58 UTC 2003

Some statistics I saw today about the widening gap between the rich and
the middle class and working poor.  These are based on Congressional
Budget Office statistics:

From 1979 to 2000...
the poorest 20% of the population increased their after-tax income by 9%.
the middle 20% increased their after-tax income by 15%.
the top 20% increased their after-tax income by 68%.
the top 1% increased their after-tax income by 201%.

In 1997 the top 1% of households had more wealth than the bottom 95%
combined.

response 14 of 36:

Sep 12 17:18 UTC 2003

13:  You're not that stupid.  

response 16 of 36:

Sep 12 21:04 UTC 2003

(those who have money are better at making/earning/investing/managing it?)

response 18 of 36:

Sep 14 17:44 UTC 2003

(more money?  widening global market?  improvements in technology?)