If you ever commit a crime and are facing justice, you'd be wise to ask for punishment similar to what mutual-fund companies get.
If you ever commit a crime and are facing justice, you’d be wise to ask for punishment similar to what mutual-fund companies get.
Throughout the mutual-fund scandals of abusive trading practices and double-dealing to give favored customers privileges ordinary investors can’t get, punishment has almost always boiled down to a fine and no admission of wrongdoing.
It goes something like this: “We didn’t do it, and we won’t do it again.”
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“Oh, and that enormous payment to settle? The regulators were overzealous in pursuing us.”
It’s hardly a satisfying end for fund shareholders, who want the bad actors drummed out of the industry and held responsible for their actions.
That’s what makes the case Massachusetts filed recently against the brokerage firm A.G. Edwards so interesting, because its likely to end in a confirmation that regulators are as tired of the run-around as consumers have been.
Secretary of the Commonwealth William Galvin charged A.G. Edwards with permitting illegal rapid trading at the firm’s Boston Back Bay office. Galvin said the moves defrauded fund shareholders, and he is seeking restitution plus a fine, in part because A.G. Edwards policy bars its representatives from making rapid trades.
In this case, the firm allegedly directed the reps involved to get “an indemnity agreement” from the favored clients. This, says Galvin, shows it knew what was going on was wrong “and management sought to protect itself through indemnity, rather than protecting fund shareholders by sticking with the rules.”
The complaint alleges that of nearly 35,000 mutual-fund trades executed through the Back Bay office from January 2001 through late October 2003, roughly 31,000 were timing trades.
Galvin thinks those trades moved more than $2 billion, racking up transaction costs by other shareholders of the affected funds.
A.G. Edwards issued a statement noting that the complaint involved “one branch, two clients and a financial consultant who was terminated by the firm in October 2003.”
While vowing to “defend ourselves vigorously,” no one at the firm actually came out and said, “We didn’t do it.”
If Galvin gets his way, this case won’t end until A.G. Edwards at least acknowledges regulators’ facts are correct.
“The usual effort on most cases has been to try to find the way to reimburse someone who has been harmed,” says Galvin, “but in the mutual-fund timing cases, it has been difficult to figure out an exact amount of reimbursement. The result has been settlements that many people have felt are insufficient, coupled with no admission of guilt.
“We have to stop the merry-go-round of accusations and settlements with no admission of guilt, because what financial firms have been saying is, ‘We won’t do it again until we can think of some new way to do it that you regulators haven’t figured out yet.’ ”
Up to now, regulators have accepted settlements without an admission of wrongdoing for several reasons, most notably the ability to get investors’ money back quickly.
Financial firms are more willing to do that when they don’t leave themselves open to civil suits filed by shareholders; an admission of guilt would make things pretty easy for plaintiffs’ lawyers.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.