WASHINGTON (AP) — More firms are likely to be charged in the burgeoning scandal surrounding the mutual fund industry, the head of the Securities and Exchange Commission’s enforcement division toldCongress Tuesday.
Stephen Cutler, testifying about the wide-ranging investigations into the management of the $7 trillion mutual fund business, said the SEC plans to send notification to some firms this week that SEC investigators intend to file charges.
Cutler spoke as the scandal struck Prudential Securities Inc., with the SEC and Massachusetts securities regulators filing civil charges alleging improper trading against former brokers and branch managers at the company’s Boston office. The regulators alleged that the brokers used several means, including false identities, to disguise rapid in-and-out trading in mutual funds to enrich themselves and the hedge funds whose money they were investing.
The move followed the announcement Monday that Lawrence J. Lasser, the chief executive of Boston-based Putnam Investments, was stepping down following the filing of civil fraud charges against the nation’s fifth-largest mutual fund company.
Cutler said the SEC had already sent notification to one firm regarding possible abuses, and said more than 100 others were being scrutinized to see if they gave the proper volume discounts to customers.
He did not name any of the companies.
Cutler’s remarks came in testimony before the House Subcommittee on capital markets, insurance and government sponsored enterprises, which also heard testimony from New York Attorney General Eliot Spitzer, who has launched several investigations of misdeeds on Wall Street.
Spitzer argued the compliance departments at many of the mutual firms need to be overhauled because they have proven ineffective.
“They have utterly betrayed the American public,” Spitzer said.
The testimony followed a Monday hearing in which senators sharply questioned the response of federal regulators to alleged trading abuses that were widespread within the mutual fund industry and among brokers that siphon money from ordinary investors.
Sen. Susan Collins said she found it shocking that the trading practices, “which benefit a select group of individuals at the expense of the vast majority of mutual fund investors, continue.”
“I question why the Securities and Exchange Commission … has failed to detect these practices, to impose appropriate restrictions on them or to penalize those who appear to be misusing investors’ money,” said Collins, chairwoman of the Senate Governmental Affairs Committee.
The SEC began a mutual fund investigation in early September, and dozens of firms have been subpoenaed, including Fidelity Investments, Janus Capital Group, Morgan Stanley and Vanguard Group. Several investment companies, including Janus and Bank of America, have pledged to make restitution to mutual fund investors who lost money through alleged improper trading.
But Sen. Joseph Lieberman wrote to SEC Chairman William Donaldson that the agency “was far too late to the table in addressing these problems.” Lieberman, a candidate for the Democratic presidential nomination, requested detailed information on the SEC’s response and plans.
Donaldson, speaking to reporters in Connecticut, said the SEC was “trying to do the best job it can to add new resources and set its priorities correctly. I don’t think it is very constructive to take pot shots at the SEC.”
The debacle has tarnished the reputation of mutual funds, traditionally viewed as a safe, conservative investment. Some 90 million people have money in U.S. stock mutual funds.
SEC officials told the Senate hearing Monday that fundamental changes were needed in the mutual fund industry operates and governs itself. That’s in addition to stiff punishment of wrongdoers, they said.
The SEC found, for example, that a quarter of the nation’s largest brokerage houses helped favored clients illegally trade mutual funds after hours.
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On the Net:
Securities and Exchange Commission: http://www.sec.gov
New York Attorney General’s Office: http://www.oag.state.ny.us
