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Mutual Funds
Scandals at a glance
Since September, the taint list has kept growing and growing.
January 11, 2004: 12:53 PM EST
By Stephanie D. Smith, MONEY magazine

NEW YORK (MONEY magazine) - Since New York State attorney general Eliot Spitzer charged in September that hedge fund Canary Capital had made improper trades in several mutual funds, the number of firms tainted by scandal has grown.

Here's where things stood at year's end.

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Alger -- Former executive James Connelly Jr. pleaded guilty to evidence tampering in a probe into market timing and agreed to a $400,000 fine; in December, he was sentenced to one to three years. Two other employees were suspended.

Alliance Capital -- In a December settlement with Spitzer over improper trading, Alliance agreed to pay a $250 million fine and cut management fees by 20 percent over five years. Earlier, Alliance fired one manager and another executive. The president of Alliance Capital and chairman of its fund distribution unit resigned.

Bank of America -- Spitzer says that B of A helped Canary place late trades. He and the SEC have brought criminal and civil charges against B of A broker Theodore C. Sihpol III for executing those trades. Sihpol has pleaded innocent.

Bank One -- Spitzer has accused its fund unit of making rapid trades for Canary and wrongly waiving redemption fees. The firm acknowledges that Canary traded too frequently. Four employees left after an internal review.

Charles Schwab -- The broker says that market timing occurred in its Excelsior Funds and late trading in its Mutual Fund Marketplace accounts. Schwab has fired two employees for deleting related e-mails.

Federated -- The firm says that late trading and market timing took place in its funds and has fired one employee; two others resigned.

Franklin Templeton -- The firm says frequent trading took place in some funds.

Invesco -- The SEC and Spitzer have brought civil charges against the firm and CEO Raymond Cunningham for allowing clients to trade in and out of its funds. Invesco's parent disputes the charges.

Janus -- Janus admits that it let clients engage in frequent trading, even though the fund prospectuses said the firm discouraged the practice. Janus has upped short-term redemption fees to 2 percent and agreed to pay shareholders $31.5 million.

Merrill Lynch -- The broker has fired three employees for processing rapid trades for hedge fund Millennium Partners.

Morgan Stanley -- In a settlement with the SEC over charges that its brokers put clients in high-commission funds, the firm has agreed to a $50 million fine. Morgan paid a $2 million fine for illegal broker incentives.

MFS -- The SEC's Boston office is recommending action against MFS for falsely stating in 11 prospectuses that the firm does not allow market timing. The firm says it is cooperating.

PBHG -- The SEC and Spitzer filed a civil suit against Pilgrim Baxter & Associates and co-founders Gary Pilgrim and Harold Baxter. The suit claims the firm allowed several hedge funds, including one that Pilgrim had a stake in, to trade in and out of the PBHG Growth fund. Pilgrim and Baxter have since left the firm.

Prudential -- The firm has fired a dozen workers; five have since been charged with fraud by the SEC for market timing.

Putnam -- In November, Putnam settled market-timing charges with the SEC and agreed to several new trading practices. CEO Lawrence Lasser was replaced.

Smith Barney -- The firm has fired four brokers for rapid trading and one for late trading.

Strong -- Amid allegations that he made rapid trades in his firm's funds, founder Dick Strong stepped down as CEO. Strong argues that his trades were not "disruptive." Spitzer has also accused the firm of giving Canary access to non-public lists of stock holdings. The company has added short-term redemption fees and is shopping for a buyer.

Wilshire -- The SEC is reportedly investigating charges first disclosed in MONEY that Wilshire engaged in rapid trading until 2002.  Top of page

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