States Embarrassing the Feds, part IV

After years (if not decades) of failing to discharge their duties with diligence or honor, we have now reached the point where the SEC is the second choice for whistleblowers.

The first choice, is of course, New York Attorney General Eliot Spitzer.

Spitzer announced a $40 million settlement with a hedge fund that allegedly engaged in illegal trading schemes with several large mutual-fund companies, potentially costing investors billions of dollars. These mutual fund companies included Bank of America Corp.’s Nations Funds, Banc One Corp., Janus Capital Group and Strong Funds. You can see the text of State of N.Y. vs. Canary Capital Partners (pdf) here).

Mr. Spitzer said the settlement was reached with Canary Capital Partners and Edward J. Stern, the managing principal of those entities. The hedge fund and its managers have agreed to make restitution of $30 million in illegal profits generated from unlawful trading and pay a $10 million penalty.

The hedge fund’s officials also agreed to cooperate with a continuing investigation of the mutual-fund industry for “engaging in fraudulent after-market trading practices with privileged institutional investors.”

Spitzer observed : “Mutual funds are the quintessential vehicle for mom-and-pop investors. To see the funds violate their obligations to these investors is enormously problematic and is in contravention to their stated policies. We are contemplating civil and criminal cases as we pursue the matter.”

The only way this sort of transgression could see the light of day is if an insider blew the whistle. These sort of mutual fund after market trades are not the sort of items you would look at during a traditional audit.

Here’s a very astute take on how and why this fell into Spitzer’s purview, and not to the SEC:

You develop a reputation for toughness, things come your way. People who feel guilty about what they’ve done confess to you. People who know that you won’t roll over leak to you. People who know that you aren’t owned by the mutual fund industry or the brokerage industry show up at your door with the goods.

Eliot Spitzer was able to break this scheme to defraud the little guy, this reprehensible selling of closing mutual fund prices to shaft you. I don’t think that anyone from a hedge fund or mutual fund would ever go to the SEC with stuff like Spitzer had. They wouldn’t go because:

1.) They wouldn’t trust the SEC to be sophisticated enough to understand the inequity of it.

2.) They wouldn’t trust the mutual funds to kill the inquiry before it got on track.

3.) They would figure the SEC would bury it rather than blow it open because it is too embarrassing.

Stiffing the Little Guy Is a Big Mistake, James J. Cramer

Thats a dead on take as to what the SEC has become. The Bush administration continues to miss opportunity after opportunity to demonstrate they are serious about cleaning up corporate fraud and malfeasance. Its astounding to me how they completely fail to see the damage done to long temr investor conifdence, present rally not withstanding.

From the appointment of industry shill Harvey Pitt as SEC chair, to the failure to get enthusiastically behind fraud reforms, the President does not seem to be getting good advice on this very important issue.

I believe in the free market, and a mostly laissez faire approach to regulation. But there must be some assurances that the game is not rigged, the playing field is level, and the bad guys will go to jail. I have yet to see evidence that this adminstration understands that.

All I can say is thank goodness for Eliot Spitzer.

Here are the prior chapters of “States Embarrassing the Feds“:
part III
part II
part I

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  1. Catherine KEYES-GUICHARD commented on Jun 11

    Since the 60’s the indudtrial nations have been pushing out the limits. In the 90’s the “anything goes” mentality easily took over the financial markets. Now we are in the “everything gone” period: cross-national trade upheald by stake holder theory, lets us believe that there are no limits, there is “no future” and so screw them all and laugh about it it! Looking at the leaders of the western world, it is no wonder that the financial elite can get away with anything!
    PhD student in financial ethics

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