• Sic ’em, Eliot Sic ’em, Eliot Everybody with a dime in a mutual fund should stand up and cheer at the $675 million in penalties levied last week against the Bank of America and FleetBoston Financial Corp. This is
• Sic ’em, Eliot
Sic ’em, Eliot
Everybody with a dime in a mutual fund should stand up and cheer at the $675 million in penalties levied last week against the Bank of America and FleetBoston Financial Corp.
This is just the sort of financial horse-whipping necessary to scare the would-be crooks out of the mutual fund industry.
New York State Attorney General Eliot Spitzer cracked the whip on the miscreants, with an assist from a newly-awakened Securities and Exchange Commission. The SEC has finally swallowed a No-Doze after snoozing through the 1990s as mutual fund crooks ran off with shareholders’ money.
Wall Street worships the almighty buck. In general, that’s a good thing. The quest for money creates a very efficient capital market, which funds businesses coast-to-coast.
But the mutual fund industry’s dollar-worship led too many fund companies to cheat. A shockingly large number – Fleet and Bank of America – among them, cut special deals for big investors who could fatten the bottom line for fund management. The big boys were allowed to buy and sell fund shares in ways that hurt small-fry shareholders.
The SEC can impose all the new rules it wants. But the only way to stop cheating is to make it very, very costly. That process is underway. By the Wall Street Journal’s count, fund companies have agreed to cough up $1.65 billion to settle cheating charges in the past six months.
And they still have to deal with circling packs of hungry plaintiffs’ lawyers ready to bite them with class-action suits.
The SEC went farther with Bank of America – barging into the bank’s Nations Funds board room and, figuratively speaking, tossing eight fund board members out on their ears.
That’s a signal to fund board members nationwide. In theory, fund boards are in charge and have the power to fire the fund’s management company. In practice, the management company runs the show, and a board seat is a fat sinecure for the narcoleptic.
The executives of mutual fund management companies hand-pick their friends to sit on fund boards, and they don’t pick boat-rockers. At the Franklin Templeton Funds, the management firm chairman graced his board with two fellow teammates on the 1953 Yale football squad, the Journal reports.
As sage investor Warren Buffett once remarked, fund companies have chosen their watchdogs from a kennel of Chihuahuas.
Board pay can run over $100,000 a year at large fund companies for a part-time job that requires smiling benignly at whatever the management company proposes – especially if it’s an increase in management fees.
The SEC and Mr. Spitzer are trying to goose board members back into consciousness. That’s why the house cleaning at the Bank of America funds is cause for applause. This should signal to board members that we are going to be very attentive to their behavior, says Mr. Spitzer.
Sic ‘em.
St. Louis Post-Dispatch
