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| 2003
News and Press Releases |
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HEADLINE ARCHIVED:
HOW MUTUAL FUNDS STOLE YOUR MONEY
By: John D. Markman
MSN.com, November 13, 2003
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EXCERPT: While your shares were handcuffed by 4 p.m. closing prices, others could wait for hours -- sometimes the next day -- before swooping in on good or bad news to make a killing. As new allegations of Wall Street wrongdoing surface virtually every day, it's hard to escape the conclusion that three years of manic-depressive stock prices, major corporate bankruptcies, and the prosecution of analysts, insider-trading and IPO frauds did nothing to inhibit a pervasive culture of corruption in much of the mutual fund industry. It's unclear whether this came about because of pressure to produce results at any cost, a blurred line between aggressive and illegal behavior or an expectation of light punishment for out-of-bounds acts. Whatever the reason, an alarming number of fund managers and their salespeople at brokerages appear to have slipped into a habit of unlawful acts that breached their fiduciary responsibility to retail customers and cost investors billions of dollars. At first, it seemed that just a handful of fund firms were involved. But new evidence suggests that large swaths of the fund industry have systematically leveraged legal loopholes and lax enforcement by federal regulators to become the white-collar equivalent of organized crime, shaking down a quarter here and a dollar there from a public that had become its patsies. "Half the industry is probably implicated in one way or another," says Mercer Bullard, a former Securities and Exchange Commission counsel who now teaches law at the University of Mississippi. The cost to mutual fund consumers could be staggering. According to estimates, the hidden price of managers' venality may have been enough to double the reported expenses of some funds at companies that engaged in unsavory practices. So if you believe you're paying 1.5% in fund expenses, or $1,500 per year for a $100,000 investment, the hidden costs may have been more like $3,000. So you would need to make at least 3% a year just to get out of the hole in a typical no-load fund. In a fund with a 5% load, you'd need to make as much as 8% a year just to start making money. Lots of dough That's not small change in a $7 trillion industry. Lawrence Lasser, disgraced former head of mutual-fund powerhouse Putnam Investments, took home $30 million annually over the past six years until he was ousted over improper trade allegations at his Boston firm. He certainly didn't make that by enriching his retail customers. In the past five years, the median annualized return of all Putnam stock funds in the MSN Money database is 0.6%. If your fund hasn't surfaced in the scandal yet, don't be too smug. The SEC last week said it believes that as many as half of all mutual funds allowed preferred customers to engage in a borderline-illegal practice known by the misnomer "market timing." Meantime, as many as 25% gave those elite customers the ability to employ an outright fraudulent practice known as "late trading."
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