The Tech - Online EditionMIT's oldest and largest
newspaper & the first
newspaper published
on the web
Boston Weather: 37.0°F | A Few Clouds

Mutual Fund Scandals Lead To Lower Investor Confidence

By Danny Hakim

The New York Times -- Last week, Roslyn Platt read in her local paper that Putnam Investments, which manages some of her mutual funds, had become embroiled in an investigation by state and federal securities regulators.

Within days, Platt, an 80-year-old retiree who lives in Mission Viejo, Calif., says she sold her Putnam shares.

“There’s so much crookedness now; I always thought a fund would be reliable and honest because it’s not an individual stock,” Platt said.

“It’s shaken my faith,” she added.

The whirlwind of financial scandal that has already rattled Enron and Tyco, Wall Street brokerage firms and the New York Stock Exchange is now engulfing the $7 trillion mutual fund industry, which has long portrayed itself as the model citizen of the investment world.

For the 90 million Americans invested in mutual funds -- representing about half of the nation’s households -- the most pressing question is whether funds are more risky than they thought.

People with money at firms under scrutiny are worried about the future of those investments. They are less angry about the small amounts of money they may have lost to favored investors granted special treatment than fearful about what else their fund firms are doing that they do not know about.

Financial advisers say owning a fund at a firm in the spotlight is considerably less of a risk than owning the stock of a company under scrutiny. But there are concerns, particularly if a fund were to see a tide of withdrawals in a short period.

Large withdrawals make it difficult for fund managers to invest, because they need more cash on hand to handle redemptions, and they can lead to higher fees and lower returns for the investors who remain.

Three of the firms that have drawn regulators’ attention -- Janus, Strong and Putnam -- have experienced some initial withdrawals, but it’s too soon to gauge the effect, and analysts said they do not yet view them as perilous.

Several investors said they were losing confidence in the Securities and Exchange Commission for allowing improprieties to happen.

“If it wasn’t for Eliot Spitzer, nothing would have happened,” said Melvin Klahr, 60, who teaches math at a community college in Miami.

He was referring to the New York attorney general, whose office touched off the investigation in early September.

Don Phillips of Morningstar, a leading tracker of mutual funds that has advised investors to consider selling funds managed by some firms under scrutiny, said, “We’re reaching some sort of critical mass where a lot more investors are starting to talk about this.”

Phillips said many investors did not take much notice until the scope of the inquiry widened in recent weeks.

“With this next round, and the escalation of the charges, it’s ‘oh wait, there were fund mangers involved and the CEO of a fund company market timing their own funds to the detriment of shareholders,”’ Phillips said. “Now, the magnitude of these issues has risen considerably.”

Federal and state regulators are investigating preferential trading terms granted to insiders, including top fund executives and managers, as well as hedge funds. The transactions raise questions of fraud and whether fund companies were fulfilling obligations to put investors’ interests ahead of their own.