9 Funds Under Suspicion

Editor's Note: We fully expect the mutual fund scandal to widen. As it does, we'll keep updating this list. We've also made a change to clarify that companies that have only received subpoenas are not in the same boat as the ones that face active investigations. When a company moves to the list of suspects, we'll be sure to update again.

We've gotten a few notes from people who are worried about having their money tied up in mutual funds tainted by scandal. Some want to know if their money is at risk, some want to know if they should sell and get out, and some have even simply wanted to know, with the rapidly expanding list, whether a certain fund company has been accused of wrongdoing or not.

We aim to serve. Here is the roster and the lowdown as of November 5, 2003. As I stated two months ago, when it was just Canary Capital and a few wayward funds, I fully expect that the extent of wrongdoing is much wider than we know at present. And also, recognize this: No fund and no manager has been convicted of a crime. But the evidence against many of them, including contracts, agreements, and hypertrading mean that from an investor's standpoint, there's really no need to wait for the judge's gavel to fall. If you're an investor in a fund managed by one of these companies, the odds are high that your trust has already been violated. Legal culpability and fiduciary responsibility are two very different things -- and in our book, technically legal isn't nearly good enough.

Here's what we know and can advise right now.

Who:
These are the mutual fund companies under suspicion of abusing their investing clients:

AllianceBernstein -- Part of Alliance Capital (NYSE: AC  ) . According to Lipper, AllianceBernstein's Technology Fund had customer redemptions of more than 1200% average total assets in 2002. Buy-and-hold my foot.

BankOne (NYSE: ONE  ) -- BankOne's OneGroup was included on Eliot Spitzer's original complaint against Canary Capital, with managers at the highest levels taking part in the deal allowing Canary to milk other shareholders' money.

Federated Investors (NYSE: FII  ) -- Has said they would reimburse clients for funds lost due to illicit trading.

Fred Alger Management -- Under suspicion of late-trading, market timing, and obstruction. Its management team has a high number of people who hold the CFA designation, which holds people to high ethical standards. I'm betting that there will be some attrition.

Janus (NYSE: JNS  ) -- Morningstar took the unusual step of removing recommendations for any Janus fund, calling the most recent problems "strike three." Good for Morningstar.

Nations Funds -- The main part of Bank of America's (NYSE: BAC  ) fund group. The allegations of wrongdoing at Nations Funds runs the full gamut.

Putnam -- Part of Marsh & McLennan (NYSE: MMC  ) , somehow Putnam has taken the worst of the abuse, with several state pensions pulling their assets under the company's management. Putnam's original problem was small, a few rogue employees trading their own funds. Putnam's response to the problem was abysmal. "Stop it, now" is appropriate for five-year olds, not fiduciaries.

Scudder -- Owned by Deutsche Bank (NYSE: DB  ) . There have been no complaints against Scudder, but Eliot Spitzer is investigating Deutsche Bank for helping wealthy clients make illegal trades. Stay tuned. Another fund company, INVESCO, has an alliance with Deutsche Bank.

Strong -- Richard Strong, the eponymous founder and head of the company, traded his own accounts for about three years. He stepped down earlier this week. Strong was also a participant in the Canary Capital scheme and was named in the Spitzer complaint.

This is the list to date, as I said earlier, I fully expect it to expand. Other fund companies, including Gabelli (NYSE: GAB  ) , Fidelity, even Vanguard have received subpoenas. In none of these cases has any wrongdoing yet been alleged. This may change.

What is at risk:
This might sound cynical, but if you're an investor with a fund at one of the companies that have engaged in illicit trading, the damage has already been done. They've already stolen from you, and your next step will be to get your records in order to be able to substantiate your ownership of the affected funds during the period of wrongdoing so that money can be returned to you. There's not much chance in your assets simply evaporating due to a mutual fund collapsing.

What to do now:
If you are invested in a fund that stands accused of allowing illicit trading, I wouldn't rush to the exits, but I'd certainly look to see exactly where they are in anticipation of an orderly evacuation. Many companies have promised full restitution to their shareholders, but determining what shareholders were in the funds at each individual case of wrongdoing will take some time. At the same time, to varying degrees these funds have shown willingness to rip you off blind. I wouldn't panic, but I wouldn't be willing to give any of them the benefit of the doubt ever again. Keep in mind, though, that the taxman doesn't particularly care if you sell a fund just to escape bad people -- think very carefully about the tax implications before you jump. We have folks here at the Motley Fool who can help, at TMF Money Advisor.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann is the Senior Investing Editor at the Motley Fool. He owns none of the companies mentioned in this story. The Motley Fool is "investors writing for other investors."


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