Spot Mutual Funds That Don’t Play Fair

Some fund companies have betrayed your trust. Before you bail out of mutual funds completely, get a handle on what’s happening, who did what to whom, and what you can do about it.

It’s a scandal fit for the tabloids—a crusading district attorney uncovers financial shenanigans, while a clueless regulator looks the other way. But this time, the scandal hit close to home if you’re one of the 91 million Americans who hold shares in U.S. mutual funds. Fund companies violated the law and broke their own rules. What’s worse is that some CEOs and fund managers—the very people that you count on to protect your interests—blatantly betrayed you by enriching themselves at your expense. As of early 2004, New York Attorney General Eliot Spitzer and the federal Securities and Exchange Commission (SEC) implicated 11 firms in the budding scandal. Investigations were expanding into other firms. Many fund companies that have so far escaped scrutiny have launched internal probes to find out if any foxes are guarding their hen houses. Already wearied by a string of corporate scandals, such as Enron and WorldCom, investors are wondering if they can trust anyone. By understanding the underlying issues, you can identify mutual funds you can trust.

During the last four months of 2003, regulators uncovered two types of mutual fund wrongdoing: late trading and market timing. The first is flat-out illegal, and the second violates the internal rules of many fund companies. ...

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