When my Daddy's car was getting low on gas and
he'd roll by a garage that didn't have its fuel prices
posted on big signs, he would observe that the
reason they weren't displayed was because the
owners weren't very proud of their prices.
The same might be said of investment and financial
service providers. I am endlessly dismayed by the
information some brokers, mutual funds, and other
industry providers exclude from client statements.
It's often difficult or impossible to determine, for
example, how much the broker's fees or
commissions are or which class of mutual fund the
investor actually owns. If this information is not
readily provided, my Daddy might have said, maybe
it's because they aren't very proud of their prices.
Even if not prominently posted, many investors are
nevertheless aware of the exorbitant prices some
mutual funds charge, particularly those that carry a
sales charge, or load. Another cost that came to light
only recently is the price some mutual fund investors
are paying to privileged customers of mutual funds.
This is the cost of investor fraud.
It's Hard to Keep Up
You may be forgiven if you have not paid all that
much attention. Rest assured, it's business as usual:
Somebody's pulling a fast one, and Main Street
investors once again wind up on the short end of the
stick. The list of abuses is long, so I will summarize
In early September New York Attorney General
Eliot Spitzer accused four mutual fund families
(Bank of America's Nations Funds, Banc One, Janus
Capital Group, and Strong Capital Management) of
fraudulent practices that enriched fund managers at
the expense of . . . guess who: shareholders. The
essence of Spitzer's charges was that these mutual
funds permitted a privileged customer to trade after
the market closed. This not only gave this customer
a huge advantage at the expense of other mutual
fund shareholders, it was indisputably illegal.
Here's why. Say Mutual Fund A owns a large block
of Company XYZ shares. After the market closes,
Company XYZ announces that it just lost a big
contract and, as a result, its earnings will be down
significantly. The privileged customer executes a
trade, dumping shares of Mutual Fund A at that
day's earlier closing price - the price it was before
the news was announced.
The next day Mutual Fund A closes down sharply,
driven lower largely by Company XYZ's news. This
downward move is exacerbated by the privileged
customer's selling. Remaining shareholders are left
holding Mutual Fund A at its lower price.
This investigation provides just one example of how
some mutual fund investors are getting taken by
Wall Street shysters. If you are not yet overcome
with cynicism, here's a few more.
Morgan Stanley recently agreed to pay a $2 million
fine to settle allegations that it held prohibited sales
contests between October 1999 and December
2002. Morgan Stanley brokers were reportedly under
intense pressure to sell in-house mutual funds and
certain lucrative annuities, potentially steering clients
into unsuitable investments. Massachusetts
authorities accused Morgan Stanley of "contempt"
for its customers.
A former Bank of America broker was recently
charged with larceny and securities fraud. He won
the distinction of becoming the first person to face
criminal (as well as civil) prosecution as a result of
recent ongoing investigations into shoddy mutual
fund trading. Spitzer said this particular investigation
"is likely to result in numerous other charges."
I could go on, but you get the picture. It's not clear
how many funds are involved. Spitzer said that
privileged customer mentioned earlier had formal
agreements with 17 mutual fund families.
How to Protect Yourself
What are we to do? Is there no sanctuary from this
plague of corruption that is spreading like an Oregon
wildfire through every investable nook and cranny,
sucking dollars from our investments? Here's a few
Come to terms with the unfortunate reality that
fraud and deception have been part of the human
landscape since Lucifer distracted Eve, and neither is
about to disappear any time soon.
Then consider that investing with a prominent name
is no guarantee that you won't get burned. Names
like WorldCom, Morgan Stanley, Bank of America,
and Martha Stewart are well-known. Yet all of these,
as well as many other big names, have recently been
charged with misbehavior. Many already have or will
soon reach a pretrial settlement while invoking the
most overused phrase of the decade: "without
admitting or denying wrongdoing."
While safety can never be entirely guaranteed, a few
relatively easy steps can reduce the likelihood that
you will become a victim of securities fraud.
First, you must take some responsibility for your
own well-being. You may not have the knowledge,
ability, or time to manage your own investments, but
you must nevertheless take a certain minimum
amount of responsibility to protect your wealth. You
must be thoughtful and observant, not get into
anything you don't understand, and seek trusted and
knowledgeable advice. A certain amount of
skepticism and cynicism can work in your favor.
If you hire an advisor or broker to manage your
assets, monitor her on a regular basis. Ask your
advisor or broker how much you are paying to
invest. How does your investment advisor get paid?
How much does your broker charge in
commissions? Does your advisor or broker tend to
put you into her company's mutual funds and
investments? If so, could this be a conflict of interest
that enriches her at your expense? Does she sell you
loaded funds that are expensive to get into, maintain,
or get out of? Does she seem to do a lot of trading
in your portfolio? If your advisor or broker does not
readily answer your questions or is not forthcoming
in laying out all the costs to you to invest, it may be
that she is not very proud of her prices.
Stick with companies that have a long track record
of treating customers well. In the mutual fund
industry, for example, I would favor names like
Vanguard, T. Rowe Price, TIAA-CREF, and others
that offer an assortment of low-cost funds, that
generate much more good publicity than bad, and
that can reasonably be expected to continue treating
investors fairly?and at a price they can be proud of.