The mutual fund families named in New York Attorney General Eliot Spitzer's probe of illegal trading practices may be in far more trouble than they first thought. Morningstar, the influential Chicago outfit that rates funds and offers advice, has taken a hard line and urged investors to sell out of these families.

"If Spitzer's allegations prove true," it writes, "it's a clear indication that all four fund firms were willing to put their companies' own profitability ahead of the interests of their fund shareholders."

Here's Morningstar's analysis on the four firms' breakdown:

  • Bank of America (NYSE:BAC) -- Advises investors to avoid BofA's Nations Funds unit, which, if Spitzer's charges are true, exhibited "a serious breakdown of compliance and a culture that placed sales ahead of fund shareholders."

  • Janus (NYSE:JNS) -- "What has soured our stomachs with Janus in particular is that the firm already had two major strikes against it: poor bear-market performance and noteworthy management departures. This ethical breach is the third strike against it. Three strikes, you're out."
  • Bank One (NYSE:ONE) -- Advises investors to sell all One Group funds "until Bank One can get to the bottom of this apparent breach of duty and demonstrate that it can be a reliable steward of investors' savings."
  • Strong -- Spitzer's charges just add to reasons to avoid Strong. "First, performance at the shop has been mediocre, particularly on the equity front." Strong also has had trouble keeping costs under control, and has undergone several manager changes.

You can bet that each of these fund families is gravely concerned about how much all this is going to cost them. I've been corresponding with a Fool reader who said he was going to sell his Janus funds, and was even thinking about terminating his Bank of America bank account. He asked the company, "If you can't respect SEC laws, or at least look out for your investors, how can the banking client expect you to respect FDIC laws and look out for your depositors?" Here's part of the BofA reply to him:

"Finally, I want to emphasize that our company has not been charged with anything. Nevertheless, our primary concern is our reputation. [CEO Ken] Lewis expects every employee to put the customers' interest first and has said that those who 'violate that trust' will have to go... Give us a little more time, and judge us by what we ultimately do."

What they and the other three fund families do better be convincing.