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The Lies About Money

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The Scandal Continues

Even more updates since The Lies About Money was published:

6/4/2007	Two former senior investment executives at Putnam Funds have agreed to pay a total of nearly $1.5 million to settle charges of short-term trading in funds over which they had investment authority. The portfolio managers traded in their personal accounts for at least four years, generating hundreds of thousands of dollars in ill-gotten profits.
6/6/2007	Citigroup Global Markets to pay NASD $3 million and refund $12.2 million to more than 200 former BellSouth employees to settle charges relating to the use of misleading materials in retirement seminars. Three Citigroup brokers and two managers also suspended for 30 days to 18 months and ordered to pay fines totaling $295,000 for telling the employees they could expect to earn 12% annually on their investments and withdraw 9% annually.
6/13/2007	Nearly ten years after fraudulent market timing in PBHG mutual funds first occurred, the SEC is distributing $73 million in restitution to investors harmed by the activity.
6/20/2007	An SEC administrative law judge has dismissed late trading charges against the former general counsel for J.B. Oxford. Although the judge found that defendant had approved more than 12,000 late trades in 600 funds between June 2002 and September 2003, the judge said he couldn’t be held accountable because he didn’t know about the rules and, therefore, didn’t intentionally break them.
6/4/2007	Janus mutual fund investors who lost money due to market timing will receive $10 or less under a proposed payment plan. About one-third will receive an average of 64 cents, and another 10% would get $28. Only 66 people would get $36,000. Janus has paid $100 million in fines.
6/21/2007	NASD fined Wachovia Securities $2 million for failing to adequately supervise its fee-based brokerage business between 2001 through 2004. The firm charged some clients fees in addition to sales loads for the same mutual fund investments. The firm was ordered to pay restitution to 1,300 customers, including 594 who paid $1.9 million in fees over two years even though they placed no trades. Additionally, two brokers incorrectly told clients that they were investing in an advisory account rather than a fee-based brokerage account.
6/22/2007	A federal judge has dismissed a lawsuit against Deere & Co. and Fidelity Investments, trustee and record-keeper of Deere’s 401(k) plan. The suit had accused the two companies of not revealing a revenue-sharing agreement and of charging unreasonable fees. The judge ruled that Deere and Fidelity were not obligated to reveal their secret kickback scheme.
6/25/2007	Without admitting or denying the charges, a former broker for Trautman Wasserman has consented to a $250,000 fine for his role in market timing and late trading. Forty mutual fund companies had sent more than 300 letters requesting that the broker stop the excessive trading. A related case against six other principals of the firm is pending.
6/26/2007	John Hancock will pay $21.2 million to settle SEC charges that it failed to disclose revenue-sharing agreements with brokerage firms in order to have those firms sell its mutual funds and variable annuities to clients between 2001 and 2004.
6/26/2007	A former lawyer at Fidelity Investments has sued the company, charging it failed to comply with anti-money laundering laws. Fidelity has counter-sued, charging the former employer with breaking a confidentiality agreement.
6/26/2007	The Alliance in Support of Independent Research, a lobbying firm whose members include executives from *Bank of New York, Capital Institutional Services, ETrade Brokerage Services, Knight Equity Markets and Morgan Keegan,** has asked the SEC to let mutual fund companies continue charging 12(b)(1) fees.
6/28/2007	After investors filed nine class-action lawsuits against brokerage firm Edward Jones ago over hidden revenue-sharing agreements, the firm paid $75 million in fines and proposed settling the lawsuits for $127.5 million. Now the firm says it overlooked 300,000 investors who should be included in the settlement, raising the total to six million people, up from 5.7 million.
6/28/2007	NASD fines MML Investors Services $473,000 to settle charges of improperly selling Class B share mutual funds. The firm will refund $2.6 million to customers who were improperly charged commissions for purchases that should have been free from 2001 through 2004.
6/28/2007	NASD fines NYLIFE Securities $354,000 to settle charges of improperly selling Class B share mutual funds.
6/28/2007	NASD fines Securities America $322,000 to settle charges of improperly selling Class B and Class C share mutual funds.
6/28/2007	NASD fines Northwestern Mutual Investment Services $100,000 to settle charges it improperly charged clients commissions for purchases that should have been free from 2001 through 2004. The firm also reimbursed $242,000 to investors hurt by the activity.
6/27/2007	The SEC accuses hedge fund Simpson Capital Management, its president and head trader with defrauding hundreds of mutual funds and their shareholders of $57 million by placing thousands of illegal late trades.
7/2/2007	The SEC is distributing $37 million to more than 300,000 investors who were harmed by fraudulent mutual fund market timing in the Columbia Funds between 1998 and 2003.
7/9/2007	BusinessWeek says scandals will forever plague the financial industry, and the next big ones will involve brokerage activities and proprietary trading. An illegal practice known as front running, which involves trading ahead of big buy and sell orders to profit unfairly from the ensuing ups and downs in prices, is making waves in the industry. The magazine says regulators have been slow to react to the growing problem.
7/10/2007	Hedge fund companies Haidar Capital Management and Haidar Capital Advisors, along with their owner will pay $4.58 million to settle SEC charges of market timing in mutual funds. The SEC say the companies earned profits of $3.3 million on $143 million in rapid mutual fund trades between 2001 and 2003 and that to shield its activity, the company created eight subsidiaries to carry out these trades, used broker/dealers with multiple registered representative numbers and also placed trades through variable annuities.
7/11/2007	In the first case of its kind, NASD has fined Securities America $375,000 for improperly sharing directed brokerage commissions from a mutual fund company with a former Securities America broker. Unlike previous disciplinary actions where fund companies paid fees to get brokerage firms to sell their products, the fund company in this case made payments for the benefit of an individual broker -- a first. The broker received $262,500 from 2002 through 2003 through an arrangement approved by Securities America.
7/11/07	A court has granted class action status on the 4th (!) lawsuit against Allianz for its annuity sales practices. In this case, which may involve hundreds of thousands of people, Allianz allegedly promised to pay bonus interest to customers who bought its annuity product. However, the bonuses were not credited until after the fifth year and only if the buyer arranged for an annuity payment of at least 10 years.
7/12/2007	Massachusetts Attorney General is investigating Bank of America, Morgan Stanley, Citigroup and other broker/dealers over sales of complex investments, such as equity-indexed annuities, which are frequently expensive and carry penalties for early withdrawals.
7/16/2007	Morgan Stanley has been fined $250,000 by Rhode Island regulators for not supervising two brokers who engaged in what regulators said were unethical and dishonest sales practices involving mutual funds and variable annuities.
7/17/2007	Edward Jones to pay $75 million to settle SEC charges it failed to properly disclose revenue-sharing and directed-brokerage agreements with seven mutual fund companies. In total, the brokerage promoted only 110 funds from those seven families since the 1990s, the SEC said. Many of the fund companies paid 25% of the advisory fees in revenue-sharing payments, and Edward Jones periodically sought to negotiate additional revenue-sharing payments from the preferred fund companies, the SEC said.
7/23/2007	Both the Securities Industry and Financial Markets Association and the Investment Company Institute sent letters to the SEC urging it not to discontinue 12(b)(1) fees, which the ICI estimates are used by 70% of funds.
7/24/2007	The Hartford Financial Services Group will pay $115 million to settle charges it conspired with Marsh & McLennan to submit false bids on property and casualty insurance, paid hidden fees to brokers and permitted some investors to market time mutual fund sub-accounts in its variable annuities.
7/25/2007	Citigroup’s Smith Barney division to pay $50 million to settle market-timing charges from the New York Stock Exchange and New Jersey regulators. NYSE also charged the company with failure to supervise trading of mutual funds and variable annuity sub-accounts and improper books and records. The regulators said 250,000 market-timing trades took place in 60 Smith Barney branch offices between 2000 and 2003, where more than 150 financial consultants took efforts to conceal their, and their clients’, identities. The trades generated $32.5 million in revenues.
7/31/2007	The former executive director and president of the private client group at Prudential Securities to pay a $100,000 fine and be suspended from supervising broker/dealers for a year to settle SEC charges that he failed to supervise registered reps who permitted their hedge fund clients to market time mutual funds between 2000 and 2003.
8/4/2007	Eighty percent of investors in 401(k) plans say they don’t know how much they are paying in fees, AARP found in a survey.
8/6/2007	A former mutual fund portfolio manager with U.S. Bancorp, now known as FAF Advisors, settled charges by the Securities and Exchange Commission that he accessed non-public information on shares of XOMA that prompted him to sell all 332,000 of his shares, worth $2.5 million.
8/6/2007	A judge has ruled that lawsuits against H&R Block may continue. Plaintiffs say the firm tricked consumers by failing to disclose expenses in the company’s Express IRA product, and by offering investment options it knew were inferior.
8/10/2007	General American Life Insurance, a division of MetLife, to pay $3.3 million to settle SEC charges it failed to prevent late trading of mutual funds in one of its variable insurance products. And a former senior vice president will pay $163,000 to settle charges he allowed a wealthy client to place 79 late trades in 2002.
8/10/2007	The SEC is distributing $55.6 million to more than 200,000 investors who were harmed by fraudulent market timing in certain Banc One mutual funds (One Group Funds).
8/24/2007	Two hedge fund managers to pay $275,000 and are banned from working for an investment advisor for 18 months to settle SEC charges of improper mutual fund trading.
8/28/2007	The judge has ordered a principal of hedge fund Clarion Management to pay more than $500,000 in fees and disgorgement for having allegedly placed illegal market timing trades in mutual fund sub-accounts in variable annuities in 2002 and 2003. The court also barred him from working at an investment advisory firm for 18 months.
9/5/2007	Peter Scannel, the former Putnam Investments call center employee who blew the whistle on mutual fund trading and set off the industrywide scandal, has been denied a $15 million payout by a Massachusetts appeals court. Scannell had sought a share of Putnam’s $193.5 million settlement under the provisions of a Massachusetts law called the False Claims Act, designed to give incentives to whistleblowers. The court said it was denying Scannell’s claim because he failed to file a lawsuit.
9/5/2007	The Financial Industry Regulatory Authority (FINRA, formerly known as NASD) fined AXA Advisors $1.2 million for failing to adequately supervise its fee-based brokerage business and distributing misleading sales literature for its fee-based brokerage account program, CapAdvantage, between 2001 and 2005 and ordered AXA to return $1.4 million in fees to 1,800 customers who were inappropriately placed or kept in fee-based brokerage accounts. The firm is voluntarily refunding customers an additional $1.2 million.
9/7/2007	A U.S. judge has ordered Merrill Lynch to pay an additional $125 million to settle 23 individual stock investor lawsuits for having published biased research by Henry Blodget. Earlier this year, a court mandated the firm pay $39 million to mutual fund investors in three lawsuits.
9/12/2007	The SEC distributed $69 million to investors harmed by fraudulent market timing in the PBHG Funds between June 1998 and December 2001.
9/17/2007	A federal judge orders a former Prudential Securities broker to pay $872,647 for his role in improper mutual fund trading.
9/19/2007	Evergreen funds and three affiliates, Evergreen Investment Services, Evergreen Service Company and Wachovia Securities will pay $28.5 million in disgorgement and a total of $4 million in civil penalties to settle SEC charges that it allowed certain shareholders to market time and engage in excessive exchange activity in the Evergreen mutual fund complex. A former Evergreen officer will pay $150,000.
9/24/2007	The SEC has charged five former portfolio managers of LP Advisors and Freedom Capital with allowing hedge fund clients to make $268 million worth of late trades in mutual funds in 2002 and 2003. Profit from the illicit activity exceeded $4 million. The five have each been barred from the industry for five years and fined a total of $340,000.
9/24/2007	The SEC has issued a cease-and-desist order against brokerage Pritchard Capital and three executives for allegedly allowing some of its mutual fund customers to late trade mutual funds between 2001 and 2003.
9/26/2007	Only two funds got a perfect score on Morningstar’s annual stewardship test, which evaluates mutual funds based on the overall investment and sales culture of the fund firm, the quality of a fund’s board of directors, manager compensation structure, the extent to which management invests in the firm’s funds, the fees the fund charges to investors and the fund firm’s regulatory history. Nearly a quarter of the thousand funds evaluated failed the test.
9/27/2007	The SEC has charged two former executive vice presidents with Brean Murray with placing $1.8 billion in late trades and market timing for a number of clients, including the hedge fund Canary Capital. More than 20 mutual fund complexes were involved; Bear Stearns was the clearing broker. The scheme earned more than $2.1 million in fees. The SEC had fined the two a total of $2.5 million in disgorgement and interest. But when the accused said they were unable to pay, the SEC waived the entire amount for one and is charging the other only $25,000. The two are also barred from working in the industry for three years.
9/27/2007	Morgan Stanley to pay to $9.5 million to settle charges that its former affiliate, Morgan Stanley Dean Witter, failed to provide emails to former clients suing the firm via arbitration proceedings as well as to regulators. The firm had claimed that its email servers were destroyed in the Sept. 11, 2001 terrorist attacks on New York's World Trade Center. In fact, the emails had been restored using back-up tapes stored in another location.
9/28/2007	A federal judge York has dismissed a lawsuit against Citigroup that alleged its Smith Barney mutual funds kept $90 million in savings by using an affiliated transfer agent and didn’t pass the savings to investors or disclose it to them.
10/1/2007	A judge is letting a former hedge fund to bring fraud claims against its law firm for its advice that late trading mutual funds was legal. The fund is suing for $4.4 billion; it was fined $36 million and two of its principals paid fines of $750,000 apiece and were barred from the industry. The fund has since shut down.
10/2/2007	Mutuals.com and two related investment advisors have settled SEC charged that they market timed hundreds of mutual funds between 2001 and 2003 and tried to hide their activities by using multiple accounts for individual clients, multiple registered representative numbers and branch codes for individual reps and broker/dealer affiliates and multiple clearing brokers. The SEC said Mutuals.com also began late trading mutual funds in 2003, earning $4.5 million. But the SEC is waiving its fine of $5.5 million because the company and the executives say they don’t have any money and can’t pay.
10/2/2007	AllianceBernstein, Putnam, Smith Barney and Salomon Brothers will pay the SEC a total of $1.7 million for failing to tell investors of their closed-end funds that distributions between 2001 and 2004 came from shareholder capital or capital gains.
10/2/2007	SEC says U.S. Pension Trust and U.S. College Trust have defrauded 14,000 investors since at least 1995 by charging exorbitant, undisclosed commissions and fees in connection with the sale of mutual funds.
10/6/2007	Fidelity Investments paid $660,000 to lobby Congress, the SEC and the Department of the Treasury in the first half of the year, the Associated Press reports.
10/3/2007	A cost analysis reported by The Los Angeles Times says AARP’s mutual; funds are more expensive than competitors, despite AARP’s longstanding reputation of protecting the interests of the nation’s senior citizens. AARP’s 2006 financial statement itself shows that about $400 million, or 40%, of the group’s $1 billion annual revenues come from “service provider relationship management fees” from products that AARP sells.
10/3/2007	In a survey of mutual fund directors and executives, two-thirds say market timing will continue, despite billions of dollars levied due to the illegal practice.
10/3/2007	Mutual fund companies continue to exhibit abysmal voting records on proxies supported by shareholders, says a report from FundVotes.com. It found that fund companies supported 91% of management proposals in the latest voting period but only 35.2% of shareholder proposals.
10/9/2007	In testimony at a Senate hearing, a lawyer representing the mutual fund industry and other business groups opposed the idea of disclosing fees in 401(k) plans. He said that disclosing 401(k) fees to investors would confuse them and cause expenses to rise.
10/9/2007	Allianz Life Insurance will pay $500,000 to settle Minnesota allegations that it sold annuities inappropriately to senior citizens. The firm also agreed to offer refunds to more than 7,000 customers.
10/10/2007	The SEC says 40% of mutual fund companies have compliance programs that are deficient.
10/11/2007	A defense lawyer representing three former Janus executives who are on trial for market timing said in court that market timing was openly practiced at the firm, and questions why other high-level executives are not also on trial. Janus has already paid the SEC $226 million to settle market-timing charges.
10/17/2007	Studies show that funds do better when their managers invest their own money in the funds they manage, but a new study by Management Practice found that less than half of all mutual funds require managers to invest their own money in the funds they run. There is no requirement at the three biggest fund families, Fidelity, Vanguard and American Funds.
10/24/2007	The FINRA Investor Education Foundation has granted $432,850 to the National Bureau of Economic Research to examine whether disclosure can help investors evaluate risks and fees.
10/26/2007	A survey by AARP found that only 17% of 401(k) participants realize they are paying fees. Sixty-five percent thought they were paying no fees at all.
10/29/2007	Although money market funds are required to only hold short-term paper with “minimal credit risks,” a number of large funds, including those run by Bank of America, Fidelity, JPMorgan and Federated, have exposure to subprime loans through offshore structured investment vehicles (SIVs), according to Fortune magazine.
10/30/2007	FINRA fines Oppenheimer & Co. Inc. $1 million for submitting mutual fund breakpoint data to FINRA that the firm knew was inaccurate. When asked to verify that it had provided customers with required discounts on mutual fund sales charges, the firm knowingly submitted flawed data to FINRA, failed to notify FINRA that the data was flawed, failed to follow up to correct the firm's data and failed to timely submit accurate data to NASD.
11/13/2007	Fabian Wealth Strategies releases a “lemon list” of poorly performing mutual funds that underperform their category averages for the past one, three and five year periods. Of the 8,500 funds in its database, 2,244 -- or 1 in 4 -- are labeled as “lemons.”
11/29/2007	FINRA fines Rafferty Capital Markets $350,000 and orders the firm to pay $59,605 in restitution to two mutual fund families in connection with customer profits derived from improper market timing and late trading in mutual funds. The firm was also ordered not to open new mutual fund brokerage accounts for 90 days.
12/20/2007	Morgan Stanley will pay $17 million to settle SEC charges that it failed to supervise four former financial advisers accused of market timing and other deceptive trading practices in variable annuity contracts.
1/7/2008	The State Street Corporation has set aside $618 million to cover legal claims related to losses from mortgage security investments. Clients have sued the firm, saying they lost tens of millions of dollars in State Street mutual funds that they were told were invested in low-risk government bonds. The lawsuit asserts that State Street changed its strategy and invested the money in subprime mortgages and related derivative contracts, but did not tell investors. State Street also announced that the chief executive of its investment management unit has resigned.
1/9/2008	Morgan Keegan and one of its fund managers is facing an arbitration complaint by clients who allege fraud, misrepresentation and omissions related to the failure to fully disclose risks associated with investments the mutual funds made in subprime related sectors.
1/26/2008	A hedge fund will pay $2.2 million to settle SEC charges it engaged in illegal market timing of mutual funds.
2/5/2008	A hedge fund, its founder and two employees will pay a combined total of approximately $40 million to settle SEC charges they engaged in illegal late trading of mutual funds.
2/5/2008	The SEC creates a new Office of Collections and Distributions and appoints two executives to lead the office. The office’s purpose is to expedite the distribution of more than $5 billion in fines collected by the SEC since 2003.
2/15/2008	California and federal securities regulators abandon 3-year-old claims that American Funds cheated investors. In dropping the case, regulators said voluntary measures taken by the firm “resolved the state’s concerns.” American Funds will pay $2.5 million to cover the state’s legal costs. American Funds is still facing action by FINRA regarding undisclosed commissions paid to brokers.
2/20/2008	A new study by Harvard Business School and University of California Marshall School of Business shows that mutual funds serving as trustees of 401(k) plans systematically overweight their holdings of the employer’s stock, causing fund investors to suffer inferior returns. As a result, participants in the 401(k) plan see their retirement benefits diminish.
2/21/2008	FINRA fines Oppenheimer & Co. $250,000 for supervisory and other failures in connection with improper market timing of mutual funds shares from January through September 2003. The firm will also pay $4.25 million in restitution to more than 60 mutual fund companies.
2/28/2008	Five brokerage firms have settled FINRA charges they permitted improper sales of Class B and Class C mutual fund shares and failed to allow investors to purchase Class A shares for free through NAV transfer programs. The firms agreed to remediation plans that will reimburse $20 million to 5,300 households. In addition, Prudential Securities will pay a fine of $1,050,000; UBS Financial Services will pay $1,000,000; Pruco Securities will pay $100,000; and Merrill Lynch $250,000. Wells Fargo will not pay a fine but will pay $612,000 in restitution.
3/5/2008	The SEC fines Fidelity Investments $8 million because 13 current or former employees improperly accepted more than $1.6 million in travel, entertainment and other gifts paid from outside brokers seeking trading business that Fidelity generates on behalf of its mutual funds. According to the SEC, those charged -- including famed fund manager Peter Lynch -- received private jet trips to Bermuda, Mexico and Las Vegas, as well as tickets to Wimbledon, the Super Bowl, concerts and other events.
3/12/2008	A federal judge approves a $14 million settlement against New York Life Insurance Co. by employees who said the company’s retirement plans were improperly invested in mutual funds owned by New York Life. According to the order, an independent consultant advised New York Life’s board that their pension plans could save more than $7 million in fees by moving its investments from NLY funds to a separately managed program. Despite this advice, the trustees did not take action until the plaintiffs filed a class-action lawsuit. The plaintiffs, who are current and former New York Life employees, charged that the company breached its fiduciary duties under the ERISA act.
3/14/2008	The SEC fines two Wachovia Securities brokers $250,000 each for their roles in a market-timing scheme that cost mutual fund shareholders hundreds of thousands of dollars in losses. One was also suspended for a year; the other for 30 days with the stipulation that he never be a supervisor again.
4/2/2008	Marc Gabelli, son of Mario Gabelli, one of the most famous and highest-paid names in the mutual fund business, will pay $16 million fine for processing market-timing trades at Gabelli Funds for a British hedge fund.
4/25/2008	The SEC announces the distribution of $30.6 million to more than 250,000 investors affected by market timing by RS Investments.
4/28/2008	A survey of 1,004 investors with a minimum of $500,000 in investible assets found that 71% distrust the mutual fund industry.
4/30/2008	A $5 million fine imposed in 2006 against American Funds will stand, according to a ruling issued by the National Adjudicatory Council, the appeals body of FINRA. The NAC upheld a finding that American Funds paid more than $98 million in undisclosed brokerage commissions to 46 brokerage firms that were top sellers of its mutual funds.
5/1/2008	Banc of America Investment Services will pay $10 million in disgorgement and penalties to settle SEC charges that it failed to inform clients that when selecting investments for discretionary mutual fund wrap fee accounts, the firm favored two mutual funds with which it is affiliated. The SEC found that Banc of America purchased at least two proprietary funds for clients with discretionary wrap fee accounts using a methodology that was contrary to its disclosures to those clients. Banc of America earned additional fees as a result of these violations because it was paid management and other fees based on the total assets in those funds.
5/7/2008	An arbitration panel has ordered mutual fund company AllianceBernstein to pay a former manager $12 million for improperly firing him during the mutual fund scandal. Alliance had paid $600 million in fines, the highest settlement fee of any mutual fund company involved, and tried to blame the manager. The arbitration panel says the firm must now say the manager terminated without cause.

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