Where's the Outrage?
By Allan Sloan
Newsweek's Wall Street Editor
Tuesday, November 11, 2003; Page E03
If you're an investment professional who's hell-bent on picking people's pockets, try to follow these simple rules. Get caught when the stock market's rising. Take a little money from a lot of people, so you won't create dramatic, sympathetic victims. Make sure you're doing something so complicated that it takes at least two sentences to explain. And, finally, try not to have Washington connections that will turn your sleazy behavior into a political story.
If you follow all these rules, you don't have to worry about being reviled on the front pages and on TV day after day, the way the likes of Ken Lay and Jeff Skilling of Enron, Bernie Ebbers of WorldCom, and Jack Grubman of Salomon Brothers were. These guys, firmly established as villains, haven't been convicted of anything and, in some cases, not even indicted. But they made a lot of money acting badly while other people lost their life savings. Today, though, mutual fund perps are admitting wrongdoing right and left -- and no one outside the business world knows their names.
Last week produced the first congressional mutual fund hearings, and showed how the fund story hasn't stirred emotions the way Enron did. Fitzgerald's hearing produced a lot of light: Regulators served up the shocking assertion that about half the fund companies they've looked at were breaking rules designed to protect investors.
Even better, Fitzgerald -- who comes from a business family and understands numbers -- managed to explain this scandal in emotional rather than intellectual terms, calling it "the world's biggest skimming operation." That evokes wonderful images of bad guys at casinos, and is exactly right. Because, to cut through the technicalities, fund companies have let a handful of investors skim relatively small amounts of money from millions of other investors.
A major reason you don't hear ordinary investors screaming about these outrages involves nomenclature. When Spitzer got a big hedge fund, Canary Capital, to cop to feathering its own nest at the expense of investors in four mutual fund families, his filings used the term "market timing," which in most contexts (but not this one) is a legitimate and legal investment technique. The Canaries of the world call what they're doing -- taking unfair advantage of mutual fund investors -- market timing because it sounds so much nicer than "skimming" or "stealing" or "looting." Wall Street, after all, is big on euphemisms.
Let's think for a minute about many of the transactions that regulators have described. Well-connected investors get real-time information about what's in mutual funds' portfolios, information that's not available to the public. Then these Connected Ones use that information to make profits. "If it's material, nonpublic and they're trading on it to their advantage, it's insider trading," says Stephen Cutler, director of enforcement at the Securities and Exchange Commission. Exactly so.
Why aren't regulators and the media using terms like "insider trading"? Because we're trained to be careful and -- don't snicker, now -- we occasionally try to be fair. In this case, though, we've been way too nice.
That could change soon, I think, because we'll learn that some fund-company malefactors were even worse than we thought. And that some of them, not content with their high pay and the profits they skimmed from their own companies' funds, bought and sold securities in anticipation of what their funds would do. That would be "front running," another nice, emotional term. Maybe we'll have an individual villain or two to focus on, finally, rather than an entire diffuse industry.
And who knows? Someone may find a potent political connection between some fund bad guys and the political elite, the way Enron's Lay was linked to George W. Bush through ties of fundraising and mutual back-scratching. Let that happen, and the fund story will leap the species barrier and become a political story. Then, finally, this story will attract the attention it deserves and we'll fix the fund industry. And the villains will get what they deserve: infamy everlasting.
Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com
posted by Richard at
Wednesday, November 12, 2003
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