We have two updates for you today in the strange mutual fund trading scandal revealed last week by our old friend Eliot "Bulldog" Spitzer, the New York attorney general.
Spitzer charged the hedge fund Canary Capital Partners, along with its principal, Edward Stern, with buying and selling mutual funds until 6:30 p.m., but at that day's closing prices (instead of the next day's close like the rest of us would have to pay). This "late trading" allowed Canary to trade practically risk-free on any news that broke after the market closed. What's more, it did this with the mutual funds' cooperation. Bill Mann offers a great explanation of late trading and related "timing" charges in Come See the Parasites.
This alleged wrongdoing hurt mutual fund shareholders because every dollar Canary made came straight out of their funds. Spitzer says mutual fund managers from Bank of America (NYSE:BAC), Janus (NYSE:JNS), Strong, Bank One (NYSE:ONE), and others cooperated with Canary.
Today, Bank of America promised it would make "appropriate restitution" to any of its Nations Funds shareholders who were hurt by the late trading. (Janus made a similar promise last week.) In addition, BofA said the adviser in the transactions would return to the fund any fees it received.
The other big news is that the U.S. Justice Department's Manhattan attorney will be teaming up with Spitzer, according to The Wall Street Journal. This, says the paper, gives the mutual fund industry cause for concern because it adds the threat of possible federal criminal prosecution to the case. (Canary already settled Spitzer's civil charges by agreeing to return $30 million in illegal profits and pay $10 million in fines.)
As Spitzer mentioned last week, we don't yet know the full extent of this fraud, and many questions are still unanswered. How many other mutual fund managers colluded with hedge funds? Just how many billions have investors lost because of it? Finally, why hasn't Rep. Michael Oxley (R-Ohio) taken his obligatory swipe at Spitzer and accused him of grandstanding and overstepping his bounds?
Even Oxley must be close to admitting that Spitzer is much more effective at ferreting out and prosecuting Wall Street wrongdoing than the feds are.
