As
new allegations of Wall Street wrongdoing surface
virtually every day, it's hard to escape the conclusion
that three years of manic-depressive stock prices,
major corporate bankruptcies, and the prosecution
of analysts, insider-trading and IPO frauds did
nothing to inhibit a pervasive culture of corruption
in much of the mutual fund industry.
The
cost to mutual fund consumers could be staggering.
According to estimates, the hidden price of managers’ venality
may have been enough to double the reported expenses
of some funds at companies that engaged in unsavory
practices. So if you believe you’re paying 1.5%
in fund expenses, or $1,500 per year for a $100,000
investment, the hidden costs may have been more like
$3,000. So you would need to make at least 3% a year
just to get out of the hole in a typical no-load
fund.
"We’ve
been approached by whistle-blowers at various major
funds and have gotten the sense that the practice
was endemic," said Robert Nelson, an attorney
at Lieff Cabraser Heimann & Bernstein. "At
some places, with management approval, you could
get a Tuesday fund price an hour into trading on
a Wednesday. Because of the way shares were cleared,
the potential for abuse was enormous."
Why
would fund companies allow this? Nelson points to
a culture focused on bringing in as much money as
possible, a culture where growth trumped integrity.
The pressure to succeed intensified during the bear-market
of 2000 to 2002 when it was as hard to make money
on stocks as it was to entice new investors to buy
them. Aggressive brokers courted hedge funds that
would park millions of dollars at a fund firm in
exchange for special privileges that allowed them,
essentially, to manufacture money out of thin air. "It
was a way to make their funds more attractive to
an elite class of short-term traders at the expense
of long-term investors," said Nelson. |
