(November 1, 2003 ) Consequences of the Mutual Fund Industry's History of Transgressions |
Dire Consequences of the Mutual Fund Industryís History of Transgressions
In a speech at the Gartner Techinvestors Summit on November 12, 2003 in New York, Edward Siedle, President of Benchmark, made the following comments regarding wrongdoing at mutual fund companies and the potential impact of such malfeasance upon certain fund complexes. (These comments were analyzed in a November 17th article by Geoffrey Colvin of Fortune Magazine entitled "Mutual Funds: The Scandal May Get Much Worse.")
1. Unethical and illegal activity is rampant throughout the mutual fund industry. Itís not just a few bad apples at a few companies. Itís everywhere. As a result of years of toothless enforcement of the applicable laws by the SEC, the industry has lost sight of the harm to investors resulting from such activity.
2. This activity has been longstanding-≠ existing for over 20 years. As mutual fund companies experienced spectacular growth beginning in the 1980s, fund executives began to believe they could do no wrong. Investors poured money into funds and products with dubious investment merits were pumped out in response to that demand. The American masses for the first time in history hired professional money managers. Funds promised the benefits of diversification, professional management and comprehensive regulation. Investors were never fully informed as to the outrageous conflicts of interest prevalent throughout the industry and the quantifiable harm related to these conflicts.
3. Illegal and improper mutual fund activity costs investors billions annually. Our investigations reveal that at a minimum 50% of all mutual fund investment advisory fees and portfolio trading costs are excessive. Fund boards have breached their fiduciary duties by causing investors to pay these costs. When you add to these excessive fees, illegal personal trading and other schemes designed to benefit insiders at the expense of retail investors, the actual long-term price tag related to the industryís misdeeds could be a trillion.
4. Our investigations have uncovered that senior managements at mutual fund advisers has aided, abetted and even participated in the illegal activity that has occurred. Compliance within mutual fund advisory firms has been intentionally ignored. False documents have been created to conceal illegal activity. Fund boards have been willing to look the other way and accept even absurd representations by managers. Managers are never fired and the threat of litigation has been minimal.
5. Non-disparagement and confidentiality agreements have enabled fund advisers to keep their misdeeds from public scrutiny. The attorney client privilege has been broadly construed to permit obstructions of justice. The SEC has ignored these practices and has looked the other way.
6. Once fully exposed, the liabilities related to certain mutual fund advisersí histories of misdeeds could cause these firms to either crumble or survive with greatly reduced operations.
Mutual fund advisers have been playing with other peopleís money for decades. To date mutual fund investors have paid the price for the industryís lack of ethics. In the future the price will likely be borne by the industry itself.