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Fund woes.

CORPORATE SCANDALS. Unethical accounting practices. Investment houses paying out settlements for misleading investors. All of those events are still vivid in most people's minds.

So we don't know whether to be angry or simply disgusted at revelations of shady practices at several mutual funds or wonder if they've been asleep for the past couple of years.

Several funds have been accused of trading shenanigans that benefit a few but aren't available to all investors.

So far, criminal and civil charges have been filed against Bank One Corp., Strong Capital Management, Bank of America and Janus funds, but a widening investigation may pull in more funds. Lawsuits will likely proliferate.

The charges claim some of the funds, not all, of the above companies have condoned allowing certain investors to trade after hours at preclosing values and to buy and sell mutual fund shares over short periods to turn a quick profit, a practice called "timing."

A recent study says late trading, the more serious of the charges, may be happening in one out of six mutual fund families--costing ordinary investors about $400 million a year.

Late trading is when a mutual fund allows an investor to trade after the 4 p.m. deadline. For most investors, if you put in a trade request at 4:01, it will be carried out at the following day's 4 p.m. price. It's easy to see how some might want to practice late trading. If, say, news broke after the market closed that would affect the market, the late trader could get the old closing price before the value went down the next day. New York Attorney General Eliot Spitzer said, "late trading can be analogized to betting today on yesterday's horse races."

To be fair, the mutual funds have denied illegal activity and said the fired flow activity after 4 p.m. could be legal futures trading. And it's not known for sure if the fund firms knew about any late trading--it could be just a few individuals.

The fund companies say they are conducting their own investigations into their practices and will make restitution to investors, if the allegations are true.

There's little doubt that the Securities and Exchange Commission will tighten up on the regulation of the mutual fired industry. Our basic philosophy of opposing unnecessary regulations is being sorely tried these days by folks who don't want to play fair. With trillions of dollars of investment money at stake, more disclosure reforms may be needed to save the industry from the Unscrupulous ones who are giving it a black eye.
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Title Annotation:mutual fund scandals
Publication:Arkansas Business
Article Type:Editorial
Geographic Code:1USA
Date:Sep 29, 2003
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