Bottom Line: The Scandal Cost Everyone Investors, Fund Firms Share Losses
May 9, 2005
At first blush, the numbers are indeed impressive.
According to government figures as of Feb. 28, the Securities and Exchange Commission has brought 25 enforcement actions related to the market timing and late trading scandal and obtained settlements totaling $2 billion. For its part, as of the end of February, the NASD has brought 12 actions related to trading abuses against broker-dealers and levied fines and restitution of more than $6 million.
But in this day, where million-dollar market timing, late trading and shelf space fines are levied like penalty minutes in a hockey game, what exactly is in a number? For the shareholders who were duped, the answer seems to be very little; and for the firm themselves, quite a lot.
"If you pay a fine to the SEC or whoever, that money doesn't do shareholders any good at all," said Tom Westle, a senior partner at the law firm of Blank Rome in New York and a 25-year veteran of the securities industry. "That's just a penalty for having been caught, or supposedly having been caught."
In perhaps the most publicized case of investor restitution, Boston-based Putnam Investments has agreed to repay investors subject to market timing and short-term trading in its funds $108.5 million. According to John Hill, chairman of the trustees of Putnam Investments, $25 million of that money has already been set aside under Putnam's settlements with the SEC and the Massachusetts Securities Division and another $45 million has been sent to the SEC for distribution to shareholders. Distribution of the $108.5 million is scheduled for completion by the end of the summer.
Hill admitted, however, that the sums due individual investors - Putnam sought an Ivy League business professor to calculate the numbers-will pale in comparison to the fines it must pay regulators.
"Although the total amount paid by Putnam under the settlements is substantial, actual losses incurred by individual shareholders are small," Hill wrote in a letter to shareholders last month. "Losses were generally concentrated in international funds, and shareholders in the vast majority of the funds incurred no or only minimal losses."
Hill retiterated in a recent telephone interview that, according to research okayed by the SEC, many investors are owed "just pennies" and they won't be getting a check in the mail. Instead, that money will go back into the funds.
"There are some investors that had larger amounts invested and they'll get a bigger check, but mostly these are very small amounts because the market timing was limited to five funds," he said, adding that the cost of cutting and mailing a check -"$6 or $7"- is much higher than most of the restitution amounts.
Putnam's Board of Trustees will meet this week for a final review of all restitution amounts. He expects a restitution cut-off of somewhere between $5 and $10.
Adam Bold, an advisor and founder of The Mutual Fund Store in Overland Park, Kan., thinks every investor impacted by the scandal is due a check on principle alone, and he said he doesn't need a college professor to calculate the amount.
Bold, who manages $1.1 billion in assets and has been advising clients to sell stakes in any fund that has been rung up for shady activity, said regulators should just determine which trades were done illegally and take all profits generated on those trade dates, plus the amount of money those investments generated in fees, and distribute it as restitution. He's steadfastly against sending a dime of it back into the fund.
"People who own the fund today get the money, and the people who owned it at the time of the illegal activity get nothing. The bottom line is that, whatever the amount is, they're entitled to it," he said.
As an advisor and host of a syndicated radio talk show on mutual funds, Bold said he's learned of other scandal-related phenomenon that have impacted the everyday investor and are much harder to quantify than fines or restitution amounts.
"There's a lot of situations, mostly in bond funds, where there was an abdication of fiduciary responsibility by the broker who sold the fund," Bold said.
In other words, poor performance and bad publicity are keeping brokers from conducting frank discussions with their clients.
"They're afraid to call the client. They're not talking at all," he said.
Or perhaps worst yet, Bold offered, there are brokers who lost their jobs during the scandal or the bear market and their client has been passed on to another office, where the new broker is now hesitant to call on the investor.
"There's a whole universe of abandoned investors out there," he said.