Jubak's Journal
Recent articles:
• Trustmark, Walgreen join my Clean Stocks list, 11/25/2003
• We need a new guard dog at the SEC, 11/18/2003
• 5 stocks to love -- that everybody hates, 11/14/2003
More...
| | Countdown 2003
Today, scandal is business as usual
The scoundrels this year are taking advantage of business as usual, which is easy to do because the possible penalties seem so trivial.
By Jim Jubak
Good ol fashioned greed. The accounting scandals at Tyco International (TYC, news, msgs), WorldCom and other companies and the conflict of interest issues that swept through Wall Street firms were about $6,000 shower curtains and $2 million birthday parties.
But this years scandals in the mutual fund industry and at the New York Stock Exchange arent about how greed or the trappings of money led some corporate executives and Wall Street analysts astray.
Theyre about the corruption of business as usual.
Consider Richard Strong, who founded Strong Capital Management, which before the scandals managed $44 billion in its family of mutual funds. Strong was worth something in the neighborhood of $800 million. He put all that at risk by rapidly trading in and out of his companys own funds in violation of company guidelines.
Investigators say that his market timing, as the practice is called, netted a whopping $600,000 over the course of several years. For that he risked everything? Why?
Getting away with it
Because Strong never expected to be caught. Neither did certain fund managers and employees at Putnam Funds (a subsidiary of the Marsh & McLennan Companies (MMC, news, msgs)), Pilgrim Baxter, Janus Capital (JNS, news, msgs), the U.S. Trust unit of Charles Schwab (SCH, news, msgs), Prudential Securities (a division of Prudential Financial (PRU, news, msgs)), Bank of America (BAC, news, msgs), American Express (AXP, news, msgs) and other fund firms.
The odds of a mutual fund manager being caught and given a painful punishment appeared to be almost nil. Thats why those implicated in the mutual fund scandal so far were willing to violate their duty to fund shareholders for such comparatively modest amounts of cash.
For example, the SEC completed a four-month review of Putnams operations in May. But the examiners found no market timing abuses because, according to fund law, companies arent required to report personal trading in fund shares by executives. The mutual fund industrys trade group, the Investment Company Institute, successfully lobbied to exempt mutual fund companies from new rules on conflicts of interest and disclosure in the Sarbanes/Oxley Act.
Of course, since the SECs staff is stretched so thin that major fund firms get inspected only every three years, at best, even the tougher Sarbanes/Oxley rules werent likely to make much difference.
Hardly scared straight
The punishments dont scare anyone, either. Strong, for example, faced SEC charges of illegal cross-trading in 1994. The settlement cost him a fine of $440,000, a promise not to do it again and the work of finding more outside directors.
Its not just mutual fund firms that get off with a slap on the wrist. Think about the 1999 settlement that the SEC struck with the NYSE over charges that it had failed to adequately supervise its brokers. No fines, just promises for better surveillance, an electronic order trail, education and quarterly audits. NYSE Chairman Richard Grasso then said the exchange would have zero tolerance for any member who violates the rules.
The NYSE didnt get around to submitting the last part of its proposal for an audit trail that would track electronic orders until early in 2003. By that time the current SEC investigation into the NYSEs failure to supervise its floor brokers was under way. A preliminary report by the SEC found that improper trades in the last three years -- thats three years after the 1999 settlement -- cost investors $155 million.
That's business as usual, with the regulators unable or unwilling to keep the insiders from taking money out of the pockets of the public investors.
And thats what makes the current round of scandals so much more depressing than any display of mere greed.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
|
