Spitzer Rides Again

Last Tuesday, New York Attorney General Eliot Spitzer announced another eye-popping settlement with two firms implicated in his ongoing investigation of trading abuses in the mutual fund industry.

The latest shoes to drop belonged to the soon-to-merge Bank of America (NYSE: BAC  ) and FleetBoston Financial (NYSE: FBF  ) . Together, the two agreed to pony up more than half a billion dollars in restitution and penalties and to -- get this -- trim the costs of their mutual funds over the next five years to the tune of $160 million.

The attorney general's office estimates a sum total of the settlement, which the Securities and Exchange Commission helped negotiate, in the neighborhood of $675 million. That would be the most extracted in the unfolding scandal and a serious chunk of change commensurate with the substance of the allegations.

I couldn't be more pleased. My work in the industry, lately with our just-launched Motley Fool Champion Funds, brings me into contact with fund managers and fund investors alike. The vast majority of both groups are decent, honest people, and the few bad apples have hurt everyone involved -- though admittedly in different ways.

Keep in mind, Bank of America's Nations Funds unit was singled out in Spitzer's initial complaint for allowing late trading, and let's be clear: Unlike market timing, which is unethical but not necessarily illegal, late trading is against the law. Spitzer even likens the practice, by which privileged investors buy or sell funds after the 4 p.m. close, to betting on yesterday's horse races.

The settlement with BOA and Fleet, whose Columbia Management subsidiary was targeted in the probe, also breaks new punitive ground in the unfolding scandal. Spitzer and the SEC have wrung big bucks and fee reductions from other firms, including Alliance Capital (NYSE: AC  ) and Sun Life Financial's MFS unit. This time, eight members of the board of directors of Nations Funds will be shown the door, apparently for looking the other way while the shop's mandatory redemption-fee policy specifically exempted a hedge fund that subsequently timed two of Nations' funds.

In related news, the country's 91 million fund investors had something to say on the matter: Hooray!

Spitzer's investigation confirms many an investor's worst fears about the mutual fund business. But it also paves the way for serious reform. Mandatory redemption fees (which discourage market timing), strict curbs on "soft-dollar arrangements," and fuller disclosure of how fund managers are compensated are all on the table.

What next? Likely more of the same. Keep your eyes open and stay informed. If you're a fund investor (and who isn't?) and if you want to beat the market (who doesn't?), you are navigating a landscape that is increasingly treacherous. Fund investing may not be rocket science, but it's getting pretty close.

Don't like rockets or science? Take a free trial ofMotley Fool Champion Funds. Just clickhere. Shannon Zimmerman is editor and top analyst of Champion Funds and owns none of the stocks mentioned here.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 506424, ~/Articles/ArticleHandler.aspx, 10/28/2016 6:40:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:00 PM
BAC $16.91 Up +0.04 +0.24%
Bank of America CAPS Rating: ****