- The Washington Times - Sunday, November 2, 2003


Federal regulators and New York’s top law enforcer, pressing for investigations into a mutual fund scandal, also are drawing up an overhaul of the $7 trillion industry that traditionally has enjoyed a pristine image.

New York Attorney General Eliot Spitzer is lashing out at the Securities and Exchange Commission for what he calls its failure to detect abuses and act quickly. “Heads should roll” at the agency, he says.

Companies must be forced to pay back to investors the hefty fees they received for managing mutual funds during the time that they allowed fund-trading abuses to occur, Mr. Spitzer said yesterday.

“If they’re expecting to get settlements [with regulators], they’re going to have to give much more back than just [investors] losses. They’re going to be paying stiff fines and giving back their management fees. They violated their trust with the American investor,” the attorney general said.

Management fees by mutual fund companies totaled more than $50 billion last year, he noted.

Eclipsed for months by Mr. Spitzer in the pursuit of conflicts of interest and abuses by Wall Street investment firms, the SEC jumped into the mutual fund investigation in early September. Dozens of firms, including Fidelity Investments, Janus Capital Group, Morgan Stanley and Vanguard Group, have been subpoenaed.

Mr. Spitzer first raised the charge that preferential trading deals for big-money customers at mutual fund companies could be siphoning billions of dollars from ordinary investors.

Congress is looking into the scandal and the regulators’ response, with Mr. Spitzer and the SEC’s enforcement director, Stephen Cutler, called to testify before a Senate committee today.

In the latest and sharpest enforcement action, the SEC and Massachusetts regulators brought civil fraud charges last week against Putnam Investments, the nation’s fifth-largest mutual fund company.

Two senior investment managers at Putnam were charged with using improper trades to profit personally from mutual funds they oversaw. The Boston firm denied any wrongdoing but confirmed that four money managers had been fired.

Yesterday, Strong Mutual Funds said its chairman, Richard S. Strong, has resigned amid an inquiry into his personal trading of the company’s funds.

The decision does not affect Mr. Strong’s role as chairman and chief executive of Strong Capital Management, the adviser to the Strong Mutual Funds, the funds’ independent directors said in a news release.

On Thursday, Mr. Strong acknowledged trading in some of the firm’s funds and said he would reimburse investors for any losses they might have sustained because of his trades. He also said he would be prepared to resign.

He is under investigation by three agencies for improper trading that officials say might have benefited him and his friends and family.

Several investment companies, including Janus and Bank of America, have pledged to make restitution to mutual fund investors who lost money through potential improper trading.

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