2 More Fired In Mutual Fund ScandalNov 11, 2003 | USA TODAY
Heads keep rolling off the chopping block in the mutual fund industry as Alliance Capital Management (AC) fired two top executives Monday.
Alliance, which is under investigation by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer, ousted President John Carifa and Michael Laughlin, chairman of the mutual fund distribution unit.
In a statement, Alliance Capital CEO Lewis Sanders said the board of directors forced the pair to resign "because they had both senior and direct responsibility over the firm's mutual fund unit, which, as previously reported, allowed inappropriate market-timing transactions, some of which had an adverse impact on mutual fund shareholders."
The statement added, "There is a high likelihood that Alliance Capital will face sanctions and penalties as the firm works to bring this matter to a close."
The ouster of the Alliance executives is yet another sign of the depth of the damage that the market-timing scandals have wreaked on an industry that was once viewed as squeaky clean.
Two weeks ago, Richard Strong of Strong Financial admitted that he engaged in market-timing trades to benefit himself and vowed to compensate investors for any losses he may have caused them.
Alliance's dismissal of Carifa and Laughlin is almost as serious as Strong's admission, says Roy Weitz, publisher of FundAlarm.com.
"It's what needs to be done," says Weitz of the firings. "What will be interesting will be if they end up somewhere else, or if they end up shunned by the industry."
On Sept. 30, Alliance suspended two executives Gerald Malone and Charles Schaffran for supposedly allowing market-timing transactions.
Market timing is the practice of allowing investors to dart in and out of mutual funds in pursuit of single-day gains. It usually occurs when investors note a strong daylong move in the U.S. market, and then bet that international stock markets, which won't open for hours, will follow suit. While short-term investors can reap big gains from such trading, returns for other investors in the funds suffer, so most mutual fund companies frown on the practice, and some funds bar it in their prospectuses.
Since September, when Spitzer brought charges against several mutual funds and a hedge fund manager, the SEC has discovered that nearly half of the USA's 88 largest mutual fund families allow some form of market timing.
In other fund scandal news:
Empire Financial (EFH) said it had received subpoenas from the SEC concerning market timing and illegal late-trading activity. Empire says it is cooperating with the SEC investigation.
Merrill Lynch (MER) fined two supervisors, Andy Williams and Curtis Brown, a total of $250,000 because of allegations brokers under their watch allowed clients to engage in market timing.