`Super Mario's' legal woes vs. his investors'

Your Funds

March 19, 2006|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

When regulatory and law enforcement officials knocked on the doors of a number of mutual funds in the scandals of 2003-2004, investors banged on the doors to get their money out.

With the smell of scandal in the air, many investors couldn't wait to pull their money out of Janus, Putnam, Alliance Capital and others, even if they didn't own funds that were directly affected by the allegations. Industry watchers like Morningstar and Lipper warned shareholders to be cautious in dealing with firms tagged by regulators.

So when the Justice Department announced March 8 that it is taking over a five-year-old civil lawsuit that seeks financial damages from famed fund manager Mario Gabelli, investors in Gabelli's fund firm had reason for alarm.

Their questions cover three key concerns:

1) Is this the same kind of event as the fund scandals?

2) Will it affect my funds?

3) Should I bail out?

The short answer to each of the questions is "No," but investors in these kinds of cases want a lot more to go on, and the case involving Gabelli provides a great example of the decision tree shareholders should climb whenever they get bad news about their fund company. And while observers don't expect shareholders to leave Gabelli's funds, some may decide it's time to go.

For Gabelli shareholders, the biggest problem may be that it's hard to separate the guy fans call "Super Mario" from the funds they invest in. GAMCO Investors - Gabelli's money-management firm - and all of its subsidiaries including the funds, are not a party to the Justice Department suit. GAMCO President Douglas R. Jamieson noted that the suit will "have no effect on our business operations or our focus on earning a return for our clients," and it's hard to argue with that.

Gabelli himself did not return my request to discuss how fund investors might react to the lawsuit.

Unlike the cases brought by regulators during the rapid-trading scandals of '03 and '04, the Justice Department suit - alleging that Gabelli was involved in an effort to create fake companies that bid for cell-phone licenses from the Federal Communications Commission - does not directly involve mutual funds at all. Instead, they stem from activities that were not conducted while Gabelli was wearing his fund-manager hat.

When New York Attorney General Eliot Spitzer and others were reshaping the image of the fund business, the watchdog firms like Morningstar put a wet blanket over almost every firm that was in the middle of the fire. The idea was to avoid those firms until it was clear that the problems had been fixed and the company had changed its attitude.

Russel Kinnel, director of fund research for Morningstar, notes that "because fund investors were not directly harmed, you can't say that investors should automatically consider whether they want to do business with the firm."

Because the case doesn't stem from Gabelli's fund-managing duties, the funds will be unaffected by its outcome; if Gabelli ever agrees to a deal or is forced to pay fines, investors will not foot the bill, nor will their funds suffer.

But whatever time Gabelli spends defending himself is time he won't spend running shareholder money. No fund shareholder likes events that take a manager's eye off the ball, but Gabelli tends to run his funds with low turnover and a focus on the businesses and industries he likes.

Investors might consider leaving the funds if Super Mario were gone; the demands of the case create a reason for concern, but not sufficient reason to bail out. If the funds involved heavy trading or regular market movements, I'd be more concerned; having known Gabelli for more than two decades, it's hard to believe anything would distract him or cause him to alter the way he invests.

jaffe@marketwatch.com

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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