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/208533436 responses total.
Have they stoned Martha yet?
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.
It just not a "sexy" story.
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.
The bigger scandal is perhaps how excessive executive compensation packages are looting corporations of investors' funds. But nobody wants to think about that right now, it seem, or its consequences for self-funded retirement plans.
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.
Yes. CEOs appear to be stealing from the stockholders.
Absolutely. The question is, what can be done about it?
The problem is somewhat compounded by the increasing rate at which smaller investors are using funds rather than direct investment. That means they are less likely to be fully informed about annual shareholder meetings and the issues presented at them, and to actually make their voices count. This means that power primarily devolves to massive stockholders in individual companies, and boards of directors, most of whom are already quite wealthy and perfectly willing to sacrifice the interests of those who voices thay'd have to strain to hear anyway.
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.
Isn't CALPERS a private fund with its own agenda? Mutual funds that are open to anyone isolate investors from the drudgery of individual company balance sheets, quarterly reports and shareholder meetings.
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.
So? What is your point?
13: You're not that stupid.
Perhaps. You explain it, then.
(those who have money are better at making/earning/investing/managing it?)
(How do you explain their remarkable increase in skill between 1979 and 2000? Improved nutrition?)
(more money? widening global market? improvements in technology?)
(that wouldn't be "skill")
(this is true, John, but you're not that stupid. you simply made a quite-likely-false assumption that the increases in income between 1979 and 2000 were due to some intangible increase in skill, whereas I'm suggesting that other factors were involved that account for the disparity. I suppose we could settle our disagreement over this point by comparing numbers from, say, 1960 to 1980, or even by looking at two 10-year spreads instead of a single 21-year spread.)
(Reading from #12, I get the impression that you are talking out of context, carson.)
(re #20: you first brought up skill (in #16), not me.)
(Hi!)
(John, you suggested a skill *increase* in resp:17. I never suggested that any skill had increased, rather that it was extant and could be a possible reason for a widening economic gap, especially when combined with factors that I mentioned in resp:18.) (however, if you happen to think that money-managing skills have increased among the general public, you just might be right. I just read a Census report that says in the year 2000, 84% of people over the age of 25 had completed high school, with 26% having a bachelor's degree or higher. the figures for 1975 were only 63% and 14%, respectively.) (Joe, we've been slowly drifting out of context for a while. we've gone from abuses/improprieties by mutual fund managers to CEO pay increases to a widening economic gap. if you can tell me what point resp:12 was trying to make within the context of what preceded it, I'll be happy to rein in my comments instead of trying to guess just what that point was.)
(My point was that 16 specifically opined skill as the point of #12. When asked how to explain the increase of skill, you went off on a tangent. Start reading from #12, then explain how I misunderstood you.)
(Joe, items don't happen in a vaccuum and I can't read minds, but I'll do my best to restate myself. truth be told, I'm *still* trying to figure out the intended point of resp:12 myself.) (to the best of my interpretation, what we had in the beginning of this item was a discussion about mutual fund companies, their managers, their investors, and their influence on business. along comes a factoid about a widening economic gap [which, now that I've had a day or two to consider, I now believe was intended for another item, perhaps one on income taxes] that, on the surface, doesn't have any relation to the discussion.) (so what's a casual BBSer to do? if you're me on the evening of September 12, 2003, you try to find the non-obvious connection, which is what I did, and I began by trying to figure out just why the economic gap might widen and how that might relate to mutual funds. "if you're struggling to make ends meet, you don't have much in the way of disposable income. if you don't have disposable income, you're not investing it. if you have disposable income, you might try investing it. if you're investing in a mutual fund, you're trusting someone else to manage the money. managers of mutual funds are managing a lot of money. some high-yield investments require a lot of money in order to participate. mutual fund managers that manage well have more money with which to play. people with more money to invest are probably seeing higher returns. many of our richest people are earning significant amounts from investments. many of our poorest people can't afford investments. richer people have more opportunity to invest because they have disposable income. those who have money are better at making/earning/investing/managing it.") (there are some faulty assumptions and leaps of logic but so far, with everything I've read, it's panned out. even in resp:0 we have mutual fund managers who have been able to work the system in order to make money for themselves and their companies because they're *better* at working the system, even if it's only for a short time [and involves a ridiculous amount of impropriety and possible illegality]. I'm certainly willing to change my mind in the face of better reasoning; until then, I'm sticking by my comment in resp:16. Joe, would it have been more palatable to you if I had included "more education?" in resp:18 in addition to everything else?)
The problem with #16, and your last, from my point of view, is described in your statement, "we have mutual fund managers . . . *better* at working the system, even if . . . [and involves a ridiculous amount of impropriety and possible illegality]." 'Twas noted in #0 that their actions WERE illegal. That is, bluntly, a form of theft. Sure, pickpockets are skillful, but we still put them in jail for practicing their art, and we don't hold them as models to emulate, as the "rich getting richer because they are better it" does.
(I didn't gather that anyone mentioned in resp:0 had served any time. further, I'm getting the strong impression that I wasn't as out of context as you would have liked for me to be, rather that my comments didn't complement your world view. are we reading the same item, Joe? can you tell the difference between objectivity and subjectivity?)
"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" (Resp 0). So they've not yet gone to jail. They still broke the law. Were all those who made out like bandits in the past six years actually bandits? Probably not. Were they all extremely skilled money managers? Again, probably not. Does more disposable income explain their increased wealth? Possibly; it's often said that it takes money to make money. Is there any way that the statement in #16 is not a gross simplification of a complex subject? Nope.
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Didn't somebody who reported to Fastow just get 5 yrs. - a reduction in return for his testimony???
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(I don't disagree with the last paragraph of resp:29. I think, Joe, that you've missed the purpose. and, I'm still waiting to see what the point of resp:12 was.)
I just thought it was related, admittedly vaguely. It's hard to argue that the widening gap between rich and poor has nothing to do with the huge increases in CEO compensation, which basically amount to CEOs plundering from the stockholders and general employees.
Mr tod, You stand corrected: First ex-Enron exec sentenced to prison Published in Portsmouth Herald - Indexed on Sep 15, 2003 HOUSTON - A former Enron Corp. treasurer pleaded guilty Wednesday to a federal conspiracy charge and became the first executive sentenced to prison in the scandal that toppled the energy company. U.S. District Judge Kenneth Hoyt sentenced Ben Glisan to five years in prison on a conspiracy charge, the maximum term allowed. Prosecutors said there was no deal to implicate higher-ranking executives such as Enron's former chairman Kenneth Lay and former chief executive Jeffrey Skilling. Glisan, 37, will be under supervised release for three years after completing his prison term.
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