Scandals inspire final Lump of Coal awards

Dollars & Sense

December 28, 2003

I'VE MADE my list, I've checked it twice.

I'm nailing the naughty, and forgetting the nice.

It's time for the second installment of the eighth annual Lump of Coal Awards, bestowed on the bad boys and girls of the fund world, the ones who deserve nothing more than an anthracite amulet in their holiday stocking this year industry as a result of behavior, performance, attitude or actions that are disingenuous, reprehensible or downright stupid.

Last week's first half of the awards focused on buffoonery that was not tied to the recent scandals sweeping the industry.

Today, the scandals take over. Being touched by legal woes is not enough to earn coal (scorn and permanent ridicule, maybe); in fact, the supposed good guys earned their share of carbon.

The final 2003 Lumps of Coal go to:

* New York State Attorney General Eliot Spitzer, for a poor choice of words.

Since firing the first regulatory shot against mutual funds in early September, Spitzer generally has been portrayed as a hero. But Spitzer labeled much of the problem activity in funds as "market timing," which is neither illegal, nor does it always involve "rapid-fire trading."

The result is that market timers, many of whom make tactical and strategic moves every few months rather than trying to roll their money every day, are now being looked at as bad guys.

Spitzer could have stopped the problem by simply calling the bad actions "mutual fund day trading."

* Morningstar, for jumping the gun on its sell-in-the-scandal recommendations.

In a situation that is, literally, changing every day, the Chicago research firm fueled confusion by telling investors to dump funds from the first firms named in the regulatory cases. Most of the firms hadn't even been charged with anything at that point.

The analysts warned investors to worry about taxes and other consequences, but that crucial message got lost in the media storm that followed the sell recommendation.

Now, some of the company's analysts have started lightening up on the firms involved. That, too, is leaving investors confused about who to avoid and why.

* The Securities and Exchange Commission, for being tough as a powder puff.

The SEC has been all-too-quick to agree to no-blame deals (where the bad guys say, "I didn't do it, and I won't do it again"), and can't seem to think outside of traditional penalties. What's more, agency officials want to cut deals fast, so that the stain of scandal can be lifted quickly.

The longer the charges go unresolved, the more pressure the fund companies are under. Letting them twist in the wind for a little while leaves their shriveling assets as a big honking reminder that pirates are not welcome in this business.

* Spitzer, again, for going after the right thing, but in the wrong way.

Spitzer has made the right move in wanting to punish wrongdoers by forcing them to cut fees, a move that will save shareholders money over time. But in his recent settlement with Alliance Capital, Spitzer crowed about getting the fund company to cut its fees by 20 percent for a period of up to five years.

Apparently, he didn't notice that Alliance has voluntarily cut its normal fees by about 75 percent in order to work as a sub-adviser managing funds for the Vanguard Group. If the firm makes that big a cut on its own, then 20 percent is not good enough; Alliance still comes out of the deal ahead of the game.

* Vanguard, for making people wonder about its binding ties.

Throughout the scandals, Vanguard has been held up as an example of all that's good in the industry. But Vanguard has a $7 billion fund - Vanguard US Growth - that is managed by Alliance Capital in which results relative to peers have been dreadful by virtually every measure.

Unlike individual investors, who might hang onto a fund run by a firm embroiled in scandal because of the tax consequences of selling, Vanguard has no compelling reason to stay and should probably be worried about the company it keeps.

* The Investment Company Institute for an offensive defense.

At its annual meeting in May, the fund industry's trade group took Congress, the regulatory community and the media to task for being hard on it. After all, the reasoning went, the industry had gone nearly 80 years without a major scandal.

While they were patting themselves on the back, they missed the point: Their job is to get it all right.

* Dick Strong, the Lump of Coal mis-manager of the year, for thinking that having your name on the door lets you make the rules.

Strong, who recently resigned as head of the Strong Funds, was charged with making fraudulent trades for his own benefit. For what would be small potatoes (OK, they're big dollars for ordinary folks), Strong appears to have blown up his life's work.

Unlike most of the people involved in the scandals, Strong was actually the face of his fund firm. That comes with additional responsibilities.

Apparently, he thought it came with extra liberties, and for that, he gets an extra helping of coal for the holidays.

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