and here's more evidence that BUSH and the Corporate KKK are at it again.....there is only one person trying to stop them....SPITZER FOR PRESIDENT!!!!
Funds and Games
By Paul Krugman
New York Times
Tuesday 18 November 2003
You're selling your house, and your real estate agent claims that he's representing your interests.
But he sells the property at less than fair value to a friend, who resells it at a substantial profit, on
which the agent receives a kickback. You complain to the county attorney. But he gets big campaign
contributions from the agent, so he pays no attention.
That, in essence, is the story of the growing mutual fund scandal. On any given day, the losses to
each individual investor were small — which is why the scandal took so long to become visible. But if
you steal a little bit of money every day from 95 million investors, the sums add up. Arthur Levitt, the
former Securities and Exchange Commission chairman, calls the mutual fund story "the worst scandal
we've seen in 50 years" — and no, he's not excluding Enron and WorldCom. Meanwhile, federal
regulators, having allowed the scandal to fester, are doing their best to let the villains get off lightly.
Unlike the cheating real estate agent, mutual funds can't set prices arbitrarily. Once a day, just
after U.S. markets close, they must set the prices of their shares based on the market prices of the
stocks they own. But this, it turns out, still leaves plenty of room for cheating.
One method is the illegal practice of late trading: managers let favored clients buy shares after
hours. The trick is that on some days, late-breaking news clearly points to higher share prices
tomorrow. Someone who is allowed to buy on that news, at prices set earlier in the day, is pretty much
assured of a profit. This profit comes at the expense of ordinary investors, who have in effect had part
of their assets sold off at bargain prices.
Another practice takes advantage of "stale prices" on foreign stocks. Suppose that a mutual fund
owns Japanese stocks. When it values its own shares at 4 p.m., it uses the closing prices from
Tokyo, 14 hours earlier. Yet a lot may have happened since then. If the news is favorable for Japanese
stocks, a mutual fund that holds a lot of those stocks will be underpriced, offering a quick profit
opportunity for someone who buys shares in the fund today and unloads those shares tomorrow. This
isn't illegal, but a mutual fund that cared about protecting its investors would have rules against such
rapid-fire deals. Indeed, many funds do have such rules — but they have been enforced only for the
little people.
In some cases fund managers traded for their own personal gain. In other cases hedge funds,
which represent small numbers of wealthy investors, were allowed to enrich themselves. In return, it
seems, they found ways to reward the managers. You make us rich, we'll make you rich, and the
middle-class investors who trusted us with their money will never know what happened.
And there's probably more. During last year's corporate scandals, each major company that came
under the spotlight turned out to have engaged in some original scams. By analogy, it's a good guess
that the mutual fund industry was cheating its clients in other ways that haven't yet come to light. Stay
tuned.
Oh, and about that corrupt county attorney: last year it seemed, for a while, that corporate
scandals — and the obvious efforts by the administration and some members of Congress to head off
any close scrutiny of executive evildoers — would become a major political issue. But the threat was
deftly parried: a few perp walks created the appearance of reform, a new S.E.C. chairman replaced the
lamentable Harvey Pitt, and then we were in effect told to stop worrying about corporate malfeasance
and focus on the imminent threat from Saddam's W.M.D.
Now history is repeating itself. The S.E.C. ignored warnings about mutual fund abuses, and had to
be forced into action by Eliot Spitzer, the New York attorney general. Having finally brought a fraud suit
against Putnam Investments, the S.E.C. was in a position to set a standard for future prosecutions;
sure enough, it quickly settled on terms that amount to a gentle slap on the wrist. William Galvin,
secretary of the commonwealth of Massachusetts — who is investigating Putnam, which is based in
Boston — summed it up: "They're not interested in exposing wrongdoing; they're interested in giving
comfort to the industry."
I wonder what they'll use to distract us this time?
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