And the "REFORMS" of the stock exchanges are going up in dust as expects....or DOLLARS as the case may be
Wall St. Fails to Learn Its Lessons
The New York Stock Exchange and the mutual fund
industry seem to be in a competition this month: Which
one can trigger more serious outrage from the investing
public?
The exchange has stunned even some of its own
members with revelations about the size of Chairman
Richard Grasso's compensation package.
The fund industry, meanwhile, may have answered the
question some exasperated investors were asking last
year in the aftermath of the scandals involving
brokerage analysts, Enron Corp., WorldCom Inc. and
other onetime market stars: "What other ways could
they possibly devise to rip us off?"
We found out on Sept. 3, when New York Atty. Gen.
Eliot Spitzer filed a court complaint detailing one private
investor's illegal or improper trading in mutual fund
shares that was allegedly facilitated by the fund
companies themselves.
A year ago, one line of discussion on Wall Street was
that "scandal fatigue" had set in: Investors were so wearied by the wave of
corporate and brokerage frauds that the outrage pool had been nearly drained.
Coincidence or not, major stock indexes reached their bear-market bottoms last
Oct. 9.
This time around, the stock market overall doesn't appear to be terribly distraught
over the NYSE's leadership crisis or the fund scandal. Key indexes fell modestly
last week, but they're still up month to date and are hanging on to their hefty gains
achieved since mid-March.
If investors stop to think about these latest Wall Street fiascoes, however, they
may find themselves even more disgusted than they were by the despicable
conduct of corporate executives in last year's bumper crop of frauds.
For one, in the cases of both the NYSE pay flap and the mutual fund trading
abuses, it would seem that the parties involved learned absolutely nothing from
the other debacles that have stained the images of corporate America and the
financial services industry in recent years.
Public anger over huge executive compensation packages has been bubbling over
since 2000, as investors have lost trillions in stock market value while many
executives have continued to receive giant pay awards.
One might think that the NYSE, as a principal regulator of the nation's biggest
companies, would want to lead by example on matters of corporate governance.
In that context, investors may wonder if the NYSE board stopped to consider
how it might look to the outside world if Chairman Grasso's pay package were to
become public, as it finally has (only after extreme pressure put on the exchange
by the media and the Securities and Exchange Commission).
Grasso's total compensation rocketed from $11.3 million in 1999 to $25.5 million
in 2001, even as stock prices — and the fortunes of many NYSE member
brokerages — plummeted.
What's more, the 57-year-old exchange chief was guaranteed to receive $48
million more between now and 2007. Last week, amid a growing firestorm over
his pay, he announced that he would forgo that extra sum.
It's interesting to note that the NYSE, which is owned by its member brokerages,
has in recent years entertained the notion of selling stock to the public to raise
capital. Given that Grasso's pay would look enormous compared with most
public companies, marketing an initial public stock offering might have proved
challenging, to say the least.
Exactly how much Grasso should be paid is a subjective issue, of course. "He
does a fantastic job," said Jonathan Macey, a securities law expert at Cornell
University. "How much does he deserve? I don't know, but it's a lot."
Grasso broke no laws in taking what the board gave him. But the NYSE ought to
know something about the importance of public perceptions and the dangers
inherent in damaging investor confidence.
In fact, the exchange's own Statement on Ethics reads in part as follows: "All
policies and practices of the NYSE and all NYSE-related conduct and activities
of Exchange employees must be in absolute accord with protecting and
preserving the integrity of the exchange."
To the media, if not to the public at large, the NYSE has long had a reputation for
arrogance. That theme surfaced again last week, when reporters asked to see
documents detailing Grasso's pay agreements.
NYSE officials allowed reporters to come to the exchange to view the 1,200
pages of documents but would not permit them to make copies and would not
post the documents on the Web.
As for Grasso's future, he has adamantly insisted that he wouldn't resign his post.
The possibility of keeping employment wasn't open for a number of Bank of
America Corp. executives last week.
They were dismissed by the bank after being named by New York's Spitzer in
the court complaint exposing trades made by hedge fund Canary Capital
Partners in some BofA mutual funds, under the Nations Funds brand name,
from 1999 to July of this year.
Spitzer alleges that Canary struck a deal with BofA to buy or sell the bank's
mutual funds after the close of regular trading, while still getting that day's prices
for the shares. Such "late trading" would be illegal; it clearly short-changes other
investors.
The bank agreed to the deal, Spitzer said, because it received other
fee-generating business from Canary in return.
Similarly, three other fund sponsors — Bank One Corp., which manages the
One Group funds; Janus Capital Group Inc. and Strong Capital
Management Inc. — allegedly allowed Canary to engage in "market timing" of
their fund shares, also in return for other business.
Market timing, meaning fast-paced moves into and out of fund shares, isn't illegal.
But it goes against the stated policies of many fund companies because such
transactions can cause trouble for portfolio managers and hurt funds' returns for
longer-term investors.
Canary settled the case with Spitzer without admitting or denying the charges.
The attorney general now is taking aim at the fund industry, and has said that he is
almost certain to bring formal charges in the case.
As with the NYSE pay controversy, the most disturbing thing about the fund
scandal is that the illegal or improper trading has been occurring in the post-Enron
environment — when financial-services executives ought to have heightened
sensitivity to any practices that smell bad, even if they aren't technically against the
law.
Spitzer's documentation of the relationship between Canary and the fund
companies shows that some fund employees did raise objections to the
arrangements. But they were overruled by people senior to them.
If the NYSE seems obstinate in the face of fire, the $6.9-trillion mutual fund
business is reeling from Spitzer's allegations — and is reacting in ways that at
least suggest genuine concern about the threat of long-term damage to the
industry's reputation.
BofA didn't wait for formal charges to clean house. Janus Capital has pledged to
make restitution to fund investors who may have been hurt by Canary's
market-timing trades.
Industry experts say virtually every fund company now is reexamining its policies
and relationships with demanding investors such as hedge funds.
Paul Haaga Jr., executive vice president at Los Angeles-based fund giant Capital
Research and Management and the current chairman of the Investment Company
Institute, the funds' trade group, said last week that the institute's board expected
to recommend a number of reforms for the industry as a whole.
One change would require all fund companies to name a compliance officer to
oversee firm practices. Many of the biggest fund companies already have
executives in that role, but the Securities and Exchange Commission earlier this
year proposed making it standard practice.
But many fund industry veterans say the business needs to be reconsidered from
top to bottom. They say the force that was driving the fund companies in Spitzer's
case to bend their own rules was the desire to earn more fee income for
themselves — even if that was at the expense of investors who own the funds
managed by the firms.
John C. Bogle Sr., the retired founder of fund titan Vanguard Group and a
longtime critic of many industry practices, said the Spitzer case pointed up the
"inevitable conflict" at fund companies that are operated for profit: "How do you
put the fund investor first when the fund company managers want to make all the
money they can?"
Yet there is no simple solution for that structural problem, short of every fund
company converting to Vanguard's structure, wherein fund shareholders
effectively own the company.
Still, other changes in fund operations and oversight can and should be ordered to
better protect investors, Bogle said. Congress already is considering some; the
SEC and Spitzer are likely to come up with others.
"In a very real sense, scandal is wonderful" for the fairer playing field it can
produce, Bogle said. The fund industry can only hope that most of its investors
will be willing to stick around to see that for themselves. |
