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New York Attorney General Says Mutuals Must Surrender Illegal Profits

Nov 3, 2003 | www.hispanicbusiness.com

New York attorney general Eliot Spitzer demanded on Monday that U.S. mutual funds give back billions of dollars in illegal profits and make sweeping changes to protect small investors.

Spitzer and other regulators told a Congress panel that the seven trillion dollar U.S. mutual fund industry had lined its pockets at the expense of its customers and should brace for a wave of prosecutions.

"The numbers are vast, hundreds of millions of dollars per company and as a consequence what we are talking about at the end of the day is billions of dollars," Spitzer said after speaking to the Senate finance subcommittee.

"Mutual funds that permitted improper market timing and illegal late trading must be required to provide restitution to their investors and to disgorge all profits that they earned in connection with those activities," he said.

Spitzer, who fought to secure a 1.4 billion dollar settlement from Wall Street banks, said the mutual fund industry needs to be reformed. Congress and the industry appear to be listening to his calls.

The Investment Company Institute, which represents the mutual fund industry, issued a statement at the hearing saying it is prepared to make reforms.

"The Investment Company Institute today identified to Congress a series of reform initiatives to combat trading abuses that have come to light at some mutual fund companies," said the statement.

However, lawmakers may seek stronger measures than the industry would like.

One move being mulled by lawmakers would require that at least 75 percent of the funds' directors, including the chairman, be independent, with no ties to the company that manages the funds.

As investigations continue, Securities and Exchange Commision enforcement chief Stephen Cutler told the panel his agency will likely file more civil prosecutions against the industry.

"I can safely predict many more enforcement actions will follow," Cutler told the subcommittee.

Lawmakers appeared appalled at the testimony presented before them.

"The mutual fund industry is now the world's largest skimming operation," said subcommittee chairman Senator Peter Fitzgerald, a Republican who is leading a Congress probe into mutuals.

"I'm not sure the mutual fund industry is ready for reform yet, but it needs to be reformed," he added.

"Simply put, investors were cheated," said William Galvin, secretary of state for Massachusetts, which is working with Spitzer in the growing probe.

Under investigation is so-called 'late trading' where a mutual fund buys a stock from a brokerage firm after the market has officially closed and share prices have been fixed for the day.

If the order is processed and the share price has climbed in unofficial trading the mutual fund quietly reaps ill-gotten gains, according to investigators.


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