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Spitzer: Mutual Fund Cos. Face Charges

Nov 20, 2003 | AP

The New York attorney general who opened the investigation into mutual fund trading abuses, said Thursday his office probably would bring criminal charges against some companies in especially egregious cases.

Criminal charges would go beyond the spate of civil actions that New York Attorney General Eliot Spitzer, other state regulators and the Securities and Exchange Commission have been lodging against big mutual fund and investment firms in recent weeks.

"It's fair to presume that there will be criminal cases brought," Spitzer testified at a hearing of the Senate Banking Committee.

Spitzer and SEC Enforcement Director Stephen Cutler, who appeared with him, played down their recent public differences over pursuit of fund trading abuses and the SEC's civil settlement accord with big fund company Putnam Investments.

They spoke the same day that Spitzer's office and the SEC charged the founders of the Pilgrim-Baxter fund family, Gary L. Pilgrim and Harold J. Baxter, with improper trading of their funds to benefit themselves and friends at the expense of longer-term shareholders.

Those civil actions were the first time since the industry scandal became public in early September that fund company leaders had been directly charged in connection with illegal trading practices.

Responding to the scandal, the House moved quickly Wednesday to adopt legislation cracking down on mutual fund abuses and providing more information for investors. But lawmakers of both parties agree that substantial work is needed before a final reform measure can be enacted.

Even the principal author of the House measure, Rep. Richard Baker, R-La., said further changes are needed for Congress to send President Bush "the strongest possible reform bill."

The House's 418-2 vote came as industry problems spread, with more big-name companies cited for allowing special trading deals that disadvantage ordinary investors and a money stampede continuing out of tainted funds. Lawmakers approved the measure after brief debate.

Treasury Secretary John Snow, who had cautioned earlier in the week that Congress should be careful that any legislation not drive up the cost of investing, said Thursday that the administration supported the basic thrust of the House-passed bill.

"Mutual funds are an extraordinarily important part of the financial structure of this country," Snow said in an interview with The Associated Press. "We must maintain trust and confidence in our capital markets and in the instruments of our capital markets like mutual funds."

The legislation that sped through the House would impose new curbs on fund trading abuses, make directors on company boards more independent from fund managers and require companies to disclose more information to investors about fees and fund operations.

It still needs approval in the Senate, where several different versions have been proposed. No action is expected before next year.

Democrats complained on the House floor that the bill was incomplete because it did not strengthen enforcement powers of the SEC and state securities regulators, yet they voted for the measure.

At the same time, Federal Reserve Chairman Alan Greenspan and Snow have cautioned Congress against passing mutual fund changes that could cost investors more in fees and diminished returns.

The issues raised could become sticking points in the Senate.

A middle class staple, mutual funds often are a principal vehicle for retirement savings and college funds. They are traditionally regarded as safe investments.

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