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Actions By Bear Stearns, Schwab Broaden Scandal

Nov 17, 2003 | Wall Street Journal The mutual-fund trading scandals continue to spread, with Bear Stearns Cos. , one of Wall Street's top trading operations, and Charles Schwab Corp. a familiar name among Main Street investors, the latest to discover possible improprieties, Monday's Wall Street Journal reported.

Bear Stearns, a big financial company that processes trades for dozens of other brokerage firms, quietly fired four brokers and two assistants last week in an action related to mutual-fund trading activity. Charles Schwab, which popularized mutual-fund investment through a pioneering "supermarket" of funds, disclosed it had found a "limited number of instances" of questionable trading as well as other issues at its U.S. Trust Co. unit.

The involvement of Bear Stearns and Schwab underlines how big brokerage firms are now being drawn into the mutual-fund trading scandals, which once centered mainly on fund-management companies and a handful of aggressive hedge funds. Morgan Stanley, another big Wall Street firm, is expected to announce a $ 50 million settlement with the Securities and Exchange Commission related to the way the company sold mutual funds to individual investors, according to people familiar with the matter. In all, more than a dozen financial companies face allegations related to misconduct in selling or trading mutual funds.

The near-daily revelations of improprieties in an industry that caters to some 54 million individual American investors with $7 trillion in pooled investments are converging in a way that suggests many financial firms often took advantage of individual investors. The chief beneficiaries were either hedge funds, which are loosely regulated investment vehicles for wealthy investors, or people in the fund-management business themselves.

Most of the practices disclosed to date relate to so-called market-timing and late-trading by investors. Now other companies face additional inquiries. Several financial services firms, in scheduled updates to their quarterly earnings releases on Friday, said they have been notified by regulators that they may be charged with failing to give mutual-fund investors appropriate discounts for commissions on large fund purchases. They include American Express Co., Wachovia Corp., Legg Mason Inc. and Raymond James Financial Inc.

Market-timing trades, while not illegal, can harm longer-term investors and violate mutual-fund prospectuses that spell out antitiming policies. The trades often are designed to buy or sell funds in advance of expected changes in fund prices. In late trading, which is illegal, investors may be allowed to submit or cancel trades later than normal fund deadlines, getting a price set at 4 p.m. that may be out-of-date based on subsequent events.

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