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News and Press Releases |
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HEADLINE:
Tainted Trading Could Knock Out Funds, Expert Claims
By: Tony Chapelle
Securities Data Publishing. December 1, 2003
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EXCERPT: If regulators can prove that illegal and unethical mutual fund trading went on for several years, could some major fund complexes go belly up? That's possible, says Edward Siedle, a former staff attorney at the Securities and Exchange Commission and a former director of compliance at Putnam Investments. "The classic definition of a billion-dollar, class-action lawsuit is something that's been going on for years with the knowledge of senior management which involves lots of customer money," says Siedle, now president of Benchmark Financial Services, an investment banking and consulting firm in Lighthouse Point, Fla., that investigates investment advisers for institutional investors. If current developments unfold along those lines, he says, and if the public and regulators discover the full extent of the mutual fund companies' culpability, the companies would face "billions upon billions of dollars in lawsuits. And that could be enough to crush some fund complexes." In 1997, Siedle brought a suit against Putnam in which he accused the firm of allowing some of its fund managers to front run, or engage in illegal trading for their own accounts ahead of trades for fund investors. Under terms of a settlement, he is prohibited from discussing the Putnam case. In his current capacity, however, he says that he is aware of "a reservoir of illegal activity in the fund industry, only a trickle of which has been disclosed to the public." He says that since the mutual fund industry took off in the 1980's, portfolio managers and others with privileged access have been engaged in illegal or unethical trading. But a law professor who supplied much of the historical analysis for New York Attorney General Eliot Spitzer believes that the extent of any wrongdoing is not great enough to threaten fund companies. "I don't think that the actual losses to shareholders will be enough to bring down any fund firms by themselves," said Mercer Bullard of the University of Mississippi Law School. Nancy M. Smith, an institutional consultant and a former securities director for the State of New Mexico, points out that even if illegal trading went on for many years, statutes of limitations will prevent investors from seeking recoveries for harm for all but a small portion of that time. Under the Sarbanes-Oxley Act of 2002, Smith says, individual investors have between two and five years to take legal action against investment firms from the date they should have reasonably discovered the wrongdoing.
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