Federal regulators and New York's top law enforcer, pressing investigations of a mutual fund scandal, also are drawing up an overhaul of the US$7 trillion industry that traditionally has enjoyed a pristine image.
New York Attorney General Eliot Spitzer is lashing out at the Securities and Exchange Commission for what he calls its failure to detect abuses and act quickly.
Companies must be forced to pay back to investors the hefty fees received for managing mutual funds during the time they allowed fund trading abuses to occur, Spitzer said Sunday.
"If they're expecting to get settlements [with regulators] they're going to have to give much more back than just [investors'] losses. They're going to be paying stiff fines and giving back their management fees. They violated their trust with the American investor,'' the attorney general told reporters in an interview.
Management fees by mutual fund companies totaled more than US$50 billion last year, he noted.
Eclipsed for months by Spitzer in the pursuit of conflicts of interest and abuses by Wall Street investment firms, the SEC jumped into the mutual fund investigation in early September. Dozens of firms have been subpoenaed, including Fidelity Investments, Janus Capital Group, Morgan Stanley and Vanguard Group.
It was Spitzer who first raised the charge that preferential trading deals for big-money customers at mutual fund companies could be siphoning billions of dollars from ordinary investors.
Congress is looking into the scandal and the regulators' response, with Spitzer and the SEC's enforcement director, Stephen Cutler, called to testify before a Senate committee Monday.
Cutler will present a survey detailing widespread industry abuses, The Washington Post reported on its Web site Sunday night. According to the survey, the Post reported, a quarter of the nation's largest brokerage houses helped clients trade mutual funds after hours, a practice that is illegal.
In the latest and sharpest enforcement action, the SEC and Massachusetts regulators brought civil fraud charges last week against Putnam Investments, the nation's fifth-largest mutual fund company.
Two senior investment managers at Putnam were charged with using improper trades to profit personally from mutual funds they oversaw.
Boston-based Putnam denied any wrongdoing but confirmed that four money managers had been fired.
Several investment companies, including Janus and Bank of America, have pledged to make restitution to mutual fund investors who lost money through alleged improper trading.
More broadly, the scandal has tarred the reputation of mutual funds, traditionally viewed as a safe, conservative investment.
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