Word: mutuals
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Steven Romick is one of the good guys. He runs a small mutual fund in Los Angeles, FPA Crescent, that prides itself on investing for the long haul. He keeps most of his own money in the Crescent fund, hasn't taken any out since he bought his house seven years ago and turns away would-be market timers at the door. There's no ethical cloud hanging over Romick's fund, but he suspects some people are too scared of funds like his to give it a try. He shakes his head with a disgusted sigh. "Individual investors...
...blame them? Mutual-fund managers have suddenly joined the long parade of suits in handcuffs that began with Enron two years ago and has led to monster fines, complex trials and a video of at least one multimillion-dollar toga party. It was bad enough when mutual-fund returns were pummeled by a two-year-long bear market that started to thaw only this spring. Then, in September, a few funds came under fire from New York State attorney general Eliot Spitzer for allowing big, sophisticated investors to game the system. The abuses are turning out to be so prevalent...
...depth of the scandal started to become clear with the alarming testimony of Stephen Cutler, enforcement director of the Securities and Exchange Commission, who spoke at hearings before the Senate last week. The SEC has so far examined records from 88 of the largest mutual funds in the country, looking for evidence of market timing--rapid, short-term trading that most mutual funds try to discourage because it drives up costs for other investors--and late trading, the illegal practice of allowing investors to trade after hours using outdated prices...
...couple of months ago, few expected to see the words "mutual funds" in a corporate-scandal headline. Even Spitzer, who spent most of last year wrestling with Wall Street's biggest investment banks, did not suspect that there was anything amiss in the funds industry until he began investigating it this summer. "Most people had accepted that the mutual-fund industry was reasonably free of these sorts of problems," he says. That reputation is partly what has driven mutual funds' tremendous growth since they were established in their current form in 1940 as a way for the average investor...
...mutual funds have outrun the regulations intended to keep them in check. Matthew Fink, president of the Investment Company Institute, a mutual-fund trade group, notes that in 1968, when the cutoff time for late trades was set at 4 p.m., there were 100 mutual funds and 300 intermediaries dealing in them. Today there are 8,800 funds and thousands more brokers, banks, 401(k) plans and trusts selling them. "The regulation has not caught up with the growth in the structure," Fink says. The poor returns of the recent bear market also created a new temptation for fund managers...