- The Washington Times - Monday, November 3, 2003


Senators in both parties lashed out yesterday at the Securities and Exchange Commission for what they said was its failure to detect abuses in a mutual fund trading scandal enveloping the $7 trillion industry with a traditionally clean image.

SEC officials and state law enforcers, who are investigating and prosecuting cases, drew a picture at a Senate hearing of abuses so widespread in the industry and among brokers that Sen. Peter G. Fitzgerald, Illinois Republican, was moved to ask: “We’re talking about serious, wholesale criminal violations coming to light, aren’t we? …”

Stephen Cutler, the SEC’s enforcement director, told the committee he wanted to “emphasize that we will aggressively pursue those who have violated the law and injured investors as a result of illegal late trading, market timing, self-dealing or any other illegal activity we uncover.”

The agency’s investigation is “continuing on multiple fronts,” said Mr. Cutler, who presented a survey detailing frequent abuses. These included one finding that a quarter of the nation’s largest brokerage houses helped clients illegally trade mutual funds after hours.

Sen. Susan Collins, Maine Republican, head of the Senate Governmental Affairs Committee, said she found it shocking that the trading practices, “which benefit a select group of individuals at the expense of the vast majority of mutual fund investors, continue.”

“I question why the Securities and Exchange Commission … has failed to detect these practices, to impose appropriate restrictions on them, or to penalize those who appear to be misusing investors’ money,” Miss Collins said.

And Sen. Joe Lieberman, Connecticut Democrat, a committee member, told SEC Chairman William Donaldson in a blistering letter that the agency “was far too late to the table in addressing these problems.” He requested detailed information on the SEC’s response and plans.

Companies must be forced to pay back to investors the hefty fees received for managing mutual funds while they allowed fund trading abuses to occur, New York Attorney General Eliot Spitzer told the hearing.

“This number will be big. It will impose pain, and it should,” he said.

Management fees reaped by mutual fund companies totaled more than $50 billion last year, Mr. Spitzer said.

Repayment of management fees would be in addition to restitution to shareholders of profits made from reputed improper trading, he said.

Meanwhile, the SEC and the National Association of Securities Dealers, the brokerage industry’s self-policing group, announced actions related to overcharges of large-scale investors in mutual funds, who could get tens of millions of dollars in refunds from brokers who failed to give them the discounts on commissions they were owed. Among the actions is a directive to nearly 450 brokerage firms to notify customers who purchased certain fund shares since Jan. 1, 1999, that they may be eligible for refunds.

In the latest jolt, Lawrence J. Lasser is stepping down as chief executive of Putnam Investments after the filing of civil fraud charges against the mutual fund company and decisions by several big state pension funds to take money out of the firm’s funds.

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