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Awards for This Year's Best & Worst

Things had to get better in 2003. That was the mantra heading into the year. After all, the market was entering its third consecutive down year and still reeling from the fallout from the bubble-burst and the ongoing war on terror. Logic only had it that things had to move upwards, because they sure couldn't get worse.

The war in Iraq buoyed the economy and things appeared to be on the upswing for the fund industry. Regulators seemed to be more focused on hedge funds than on mutual funds and the Investment Company Institute even successfully lobbied against legislation that would have required mutual funds to provide individualized fee statements. Sure, clear sailing seemed far ahead.

Then the Pearl Harbor of the mutual fund industry hit. However, this day of infamy was Sept. 3, 2003, a day that will surely mark the beginning of a new era of accountability. While we're still in the midst of the fund scandal and new revelations and twists come pouring in daily, 2003 produced a handful of winners and a slew of losers.

Here is Money Management Executive's Fund Folly Awards of 2003.

And the Award Goes to...

Fidelity Investments and

Smith Barney

Following the first few months of an apparent economic turnaround, Smith Barney and Fidelity were back to their old tricks, touting recent performance in ads in places like The Wall Street Journal (see MME 8/8/2003). Over the summer, Fidelity bragged about its Fidelity Leveraged Company Stock Fund and its 44.9% year-to-date, while Smith Barney ran a series of ads.

These ads neglected the lessons learned during the bear market, fed the dangerous return-chasing mentality, and promoted a philosophy that is contrary to the long-term, buy-and-hold, outlook that mutual funds are supposed to possess.

And the Award Goes to...

Barry Barbash, Partner Shearman & Sterling

Dishonorable Mention...

Stanford professor Eric Zitzewitz

Marsh & McLennan Companies (MMC), parent company of Putnam Investments hired Barry P. Barbash, a partner at the law firm Shearman & Sterling and head of the firm's asset management group, best-known for having once served in Paul Roye's job at the SEC, to conduct reviews of the firm's policies and controls. As former director of the SEC's division of investment management, Barbash was among the most senior financial services regulators in the country, with principal oversight over the mutual fund industry.

However, it must be noted and cannot be forgotten that during his tenure at the SEC in mid to late 1990s, Putnam was having problems. Employees were putting their own interests ahead of those of investors (see MME 11/17/03.) Same goes for a large number of fund companies in the industry.

Ironically, while the SEC did little to curb these practices during Barbash's watch, he now finds himself on the payroll of one of the biggest offenders in the fund scandal.

However, despite what CNBC has dubbed him, just don't call him "Mr. Fix It." Barbash says he was simply retained by MMC to review its policies and procedures.

And deserving of an dishonorable mention in this category is Eric Zitzewitz, the Stanford University professor who researched and wrote a highly publicized report detailing the negative effects on market timing on long-term investors. Zitzewitz, who said market timers cost shareholders $5 billion per year, was actually involved in his own rapid in-and-out trading scheme over a three-month period this past summer. So much for glass houses.

The trades he reportedly conducted were not illegal, but did result in disciplinary action at UBS AG, the firm handling his account. Zitzewitz ceased these trades in September. Reports indicate he was not aware of UBS' policy regarding timing at the time he conducted the trades.

And the Award Goes to...

Bank of America & FleetBoston Financial

One of the four mutual fund firms originally implicated by Eliot Spitzer on Sept. 3, BofA managed to deflect a lot of the public scrutiny by purchasing FleetBoston Financial Corp., creating what will be the second-largest bank and fourth-largest fund complex (see MME 11/03/2003.) The merger brings a number of fund families under BofA's roof, including the Columbia funds, which could provide BofA with notable options should it decide to rebrand the scandalous Nations Funds name.

And the Award Goes to...

SEC & Putnam Investments

In a highly criticized move, the SEC announced that Putnam Investments had settled with the federal regulators and promised to reform its operations and repay cheated investors. However, Putnam did not admit any wrongdoing, and the SEC had not set a dollar amount for the penalty. Judging from Alliance's $600 million settlement, the bar may now be set quite high.

State regulators were extremely unhappy with the Putnam settlement, as New York AG Eliot Spitzer called the deal "a joke" and Massachusetts Secretary of the Commonwealth William Galvin was "outraged at the SEC," saying "Putnam has not come clean."