We're 'mad as hell!'
We actually pay fund managers to invest in Enrons?
By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 12:09 AM ET Feb. 12, 2002
LOS ANGELES (CBS.MW) -- "I'm mad as hell and I'm not going to take it anymore!" screamed Howard Beale, the outraged anchorman in Network, Sidney Lumet's brilliant 1976 movie satirizing television news.
Well, I'm mad as hell too. Yes, at unsavory CEOs like Jeffrey Skilling. But mainly at the huge numbers of professional fund managers who failed me and invested my hard-earned money in Skilling's scheme, Enron.
You guys should have known better. We trusted you. You should have blown the whistle.
Enronitis will kill American capitalism
American capitalism is in deep trouble when guys like Skilling, Enron's CEO when it was America's 7th largest corporation, have the gall to insult our intelligence by telling Congress that he had no idea his company was in trouble when he left last August.
Would Jack Welch make such an irresponsible claim? Skilling's own staff warned him months earlier of the time bomb in Enron's offshore off-balance sheet partnerships. They even warned that they were being used to hide debt, inflate earnings and deceive investors.
Skilling should have pled the Fifth Amendment. Not for legal protection, mind you. As my grandpa used to say, if people think you're stupid, better to keep your mouth shut and let them think it, rather than open your mouth and prove them right.
Why funds? So-called 'professional management'
But Skilling's not the real problem. On page one of the first chapter of my book, Mutual Funds on the Net, I wrote: "Certainly the number one reason most investors conclude that mutual funds are the 'perfect' investment vehicle for them is the fact that the funds are professionally managed."
That's why all 65 million of America's mutual fund investors should be mad as hell!
We pay the average fund manager $436,500 annually -- more than 10 times what the average American makes -- and they failed us by investing our hard-earned money in the Enron Ponzi scheme.
Failing the "reasonable fund manager" test
Oh, Skilling knew. His staff called him a "control freak." He was in the top 5 percent at Harvard Business School. He's just having a convenient memory loss.
He personally made millions off these partnerships, money that's probably still sitting in some offshore tax haven. He knew.
And you fund managers should have known too -- instead of investing billions in Enron. America's courts judge people by measuring their behavior against a "reasonable man" standard. Now America's investors are judging you by a "reasonable professional fund manager" test -- and you flunked.
I'm mad as hell that as "reasonable fund managers" you guys didn't uncover Enron's fraud. I'm mad as hell that hundreds of fund managers failed in their responsibilities, invested in Enron, and not one uncovered this giant global rip-off.
Your research and your due diligence were inadequate. So yes, I'm mad as hell that you did not protect us against con-men like Skilling. You obviously weren't doing your job right.
Fund managers better take responsibility
Fund managers should have known better, but failed. Imagine 1,496 funds and classes of funds investing billions in this scheme, according to September data from Morningstar.
You failed us. America's fund managers, the fund families, their trade organization the Investment Company Institute (ICI) -- the entire fund industry needs to stand up and take responsibility.
Yes, we're mad as hell and we want our fund managers to tell us why this won't happen again.
I know some fund families are telling executives they want assurances against future conflicts-of-interest between auditors and consultants. And the ICI is behind 401(k) reform. That's not enough! Take responsibility! What are you guys talking? Better research policies? What?
Industry committee to renew confidence
Yes, I'm mad as hell and I want some action. We need an industry committee looking into this with some of its top leaders behind it.
Here's a few with clout. I researched Morningstar's September database, shortly after Skilling resigned and Lay returned, to see which funds and families owned Enron. Here are some of the big holders, the ones who should take an active leadership role in an industry-wide effort to renew investor confidence:
Janus' Blaine Rollins The Janus family manages roughly $112 billion. Blaine Rollins' $25 billion Janus Fund (JANSX: news, chart, profile) had over $1 billion invested in Enron, 2.9 percent of total assets, per the fund group's most recent filing at the time. And that's not all, Janus Twenty (JAVLX: news, chart, profile) had another $560 million, Janus Mercury (JAMRX: news, chart, profile) $411 million and Janus Growth & Income (JAGIX: news, chart, profile) another $215 million. Janus prides itself for the lengths that they take to get to know the company. What are you guys doing to make sure more Enrons won't happen?
Fidelity' Robert Stansky Fidelity controls $508 billion total assets. Bob Stansky's $79 billion Magellan Fund (FMAGX: news, chart, profile) had $320 million in Enron. Okay, so they have 250 other holdings and Enron was only 0.37 percent. But that's no excuse for not investigating suspicious dealings. The same goes for Steven Kaye's $34 billion Fidelity Growth & Income (FGRIX: news, chart, profile). They had $180 million in Enron. Listen you guys, we're mad as hell and we don't like these lapses in responsibility.
Vanguard's Gus Sauter Vanguard manages $430 billion. Maybe Gus Sauter has an excuse because his index funds are mandated to resemble the indexes that they track, even if the index in question happens to own an Enron. But James Barrow's $22 billion Windsor II fund (VWNFX: news, chart, profile) had $82 million invested in Enron last summer. Tell us how you'll prevent a reoccurrence. No excuses. Action!
Rule one: Give us real professional management
Yes, widespread: All the major fund families, AIM, Alliance, American Century, Merrill Lynch, Morgan Stanley, Oppenheimer, Putnam, and others, each had at least $100 million in Enron.
How embarrassing! To think that none of these fund managers saw through the Enron scam. They all failed in their responsibilities to America's investors.
ICI should get in the act. Forget Skilling, he'll get his due elsewhere. We're mad as hell at our highly-paid fund managers.
So clean up your act guys: Tell us what you're doing now to prevent this from happening again and to strengthen American capitalism.
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