Originally created 09/15/03

Investors lack protection from unethical fund companies



NEW YORK -- Investors trying to determine whether mutual fund companies put shareholders' interests above their own face a difficult task.

After last week's charges against four companies that they allowed a hedge fund to make illegal trades, investors understandably want to know how to protect themselves. But there's little they can do to guarantee they're not buying into fund companies that have questionable ethics, said Don Phillips, managing director of fund tracker Morningstar Inc.

"It is hard to know who is (trustworthy), because frankly, what these firms have done is unfathomable," Phillips said.

The companies facing those charges by New York Attorney General Eliot Spitzer, are Bank of America's Nations Funds, Banc One, Janus and Strong. The improper trades could have cost investors billions of dollars, Spitzer said.

One suggestion is that investors avoid faddish sector funds, especially if they are sizzling. The thinking is that the hotter the fund, the bigger the potential profits and the more likely companies will be tempted to give bigger investors an advantage over smaller ones. But, Phillips pointed out, it's difficult to prove that companies are in fact allowing such illegal activities.

Eric Tyson, author of "Mutual Funds for Dummies," recommends investors keep a list of fund companies that have been implicated in unethical or illegal dealings, and refer to it when considering a fund.

"When you are thinking of what companies you want to do business with, integrity is very, very important," Tyson said.

But that's not a guarantee that you won't get burned.

"A week ago, you would have included Janus, Bank of America and Strong among those you could trust," Phillips said.

Roy Weitz, publisher of FundAlarm.com, agreed, saying, "It is sort of the ultimate helpless feeling of: What do we do?"

Weitz's frustration - and those of fund shareholders overall - grows out of charges by Spitzer that the four fund firms allowed a New Jersey hedge fund, Canary Capital Partners LLC, to make improper trades that benefited Canary and the companies over individual shareholders.

Spitzer said the firms bent the rules applied to most investors and allowed Canary to make after-hours trades and short-term "in and out" deals. Spitzer said his investigation, begun earlier this year, was ongoing and it was "a near certainty" that other mutual and hedge fund companies would be named.

Shareholders of the funds operated by the four firms named last week should pay close attention to how the companies deal with the charges, Phillips said.

"You have to hope they take it seriously. It is next to impossible to go in and poke around and ask the kind of question to make sure the companies are behaving on the up and up," Phillips said. "You have to hope the system starts to work and polices these kind of actions."

On Monday, Bank of America said it would reimburse shareholders harmed by wrongdoing by its Nations Funds. The bank said Nations Funds' independent trustees will hire an outside firm to figure out if shareholders lost money.

Janus Capital Group Inc. said Friday it would repay its investors.

Spitzer, meanwhile, urged investors not to dump their funds.

"I don't recommend mutual fund investors rush out and sell their shares," Spitzer said. "Hopefully this (investigation) will make clear that this behavior will not be tolerated."

Weitz at FundAlarm.com said he also plans to take action, possibly by putting a database of fund scandals on the Web site as early as next month.

"There should be something essentially where they are up there to be shamed or where they know that ... (these firms) were involved in something unethical."