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Week in Review

Former Prudential Broker Pleads Guilty to Timing

Justin F. Ficken, a former broker with Prudential Securities, pled guilty before U.S. District Judge Patti B. Saris last Monday to deceptively market timing mutual funds for seven hedge funds between January 2001 and September 2003, earning himself and two other brokers a combined $6 million in commissions.

The announcement came from U.S. Attorney General Michael J. Sullivan and Acting U.S. Postal Inspector in Charge Gerard Carmody.

The charge was one count of conspiracy, three counts of wire fraud and two counts of securities fraud. Ficken faces 105 years in jail and a $12 million fine. Sentencing is scheduled for Dec. 10.

The two other brokers, Martin Druffner and Skifter Ajro, previously pled guilty to wire and securities fraud. Ajro was freed on two years' probation, and Druffner awaits sentencing.

The U.S. Postal Inspection Service investigated the case, and Assistant U.S. Attorney Jack Pirozzolo prosecuted it.

Market Turmoil Expected To Hit a Number of Funds

A number of leading mutual and pension funds are invested in AIG, Lehman and Merrill Lynch, and could seriously suffer both in performance and redemptions. How badly the shock to investors' retirement savings will be, has yet to be sorted out, however.

"This is an extreme sort of event, and it will take days and months to figure out the precise consequences," Amiyatosh Purnanandam, an assistant finance professor at the University of Michigan told the Toledo Blade.

Two of the largest fund firms to have exposure to Lehman as of June 30 are Fidelity and Vanguard, with respective exposures of 6% and 3%.

While Lehman stock is expected to drop to nothing, Merrill Lynch shares were exchanged for 0.8595 shares of acquirer Bank of America.

Some analysts believe the shakeout will be felt for months to come. John Carusone, president of the Bank Analysis Center, an investment banking consultancy, told the Stamford Advocate: "It'll be the financial equivalent of Hurricane Ike for the next few months. If you invested in Lehman Brothers, then those portions of your investments will take it on the chin."

Ciaran O'Hagan, a credit strategist at Societe Generale, had a dire outlook: "The losses look to be widespread, hurting the public through their mutual and pension funds. It's clearly a disaster for public confidence."

Some Fund Investors Ask About Lehman Exposure

With Lehman Brothers in Chapter 11, Bank of America acquiring Merrill Lynch, Fannie Mae and Freddie Mac bailed out by the government, Bear Stearns acquired by JPMorgan and the future of AIG and Washington Mutual now hanging in the balance-mutual fund investors are calling complexes to find out about potentially treacherous exposure. But so far, The Wall Street Journal reports, they are holding steady and not seeking mass redemptions.

"Investor behavior is taking the longer-term view," said Waddell & Reed Senior Vice President Tom Butch. Acknowledging that stock funds have seen some redemptions, overall, Butch said, investors are remaining calm and looking to the long term. Waddell, PIMCO and American Beacon Funds saw no increase in call volume last Monday, when the Dow Jones Industrial Average plummeted 504 points. At Vanguard, calls surged in the early part of the day but then subsided, according to a company spokesman.

Funds More Conscientious About Fair Value: Deloitte

Market unrest, the credit crisis and an updated FAS 157 are prompting mutual fund companies to be more meticulous about fair value pricing, Deloitte reported last Monday in its "2008 Fair Value Pricing Survey," its seventh annual such report.

Seventy-four percent have altered their valuation policies and procedures in the past year, with 63% saying FAS 157 was directly responsible for doing so.

Thirty-seven percent said they have added internal controls as a result of the credit crisis, and 50% seek more than one quote for fixed income securities.

More than 75% are asking pricing services and brokers for details about how they arrive at prices, and 46% said that their portfolio managers and/or traders are creating pricing reports for fund accounting top management executives.

Today, more than 46% have at least two full-time staffers devoted to fair value, whereas only 29% did last year. The report was based on surveys of 50 asset managers running more than 2,700 funds with aggregate assets of $3.5 trillion.

"Mutual funds have been challenged over the last year to perform daily pricing in very uncertain times," said Cary Stier, head of asset management services for Deloitte.

Bent in Favor of New Money Market Fund Rules

Bruce Bent, chairman of The Reserve and the creator of the first money market mutual fund, is breaking from the pack that has been critical of the Securities and Exchange Commission's proposal of the rule governing money funds to lessen their reliance on credit rating agencies.