Mutual Funds: Study Says Illegal Trading Common
Sept. 18 -- As regulators step up their probe into allegations of improper activity by mutual funds, a new study suggests illegal late trading may be more widespread than previously reported.
The study by Stanford University Prof. Eric Zitzewitz found that late trading — in which investors are allowed to trade after the close of markets at preclosing values — appears to be happening in one out of six mutual fund families, at a cost to ordinary investors of about $400 million a year.
"I didn't think it would be as widespread than it was since late trading is so illegal — and illegal in a way that almost everyone in the industry understands," Zitzewitz said.
A mutual fund lobbying group, however, criticized the study's methodology and said Zitzewitz could not really determine that late trading occurred.
"There's a number of open questions that the paper does not fully address," said Brian Reid, senior economist at the Investment Company Institute.
The study comes as New York Attorney General Eliot Spitzer and the Securities and Exchange Commission announced criminal and civil charges Tuesday against former Bank of America employee Theodore Sihpol over late-timing activity they say cost investors millions of dollars.
Firms Accused of Late Trades
Spitzer has accused hedge fund Canary Capital Partners LLC of illegal trading involving Bank of America, Janus, Bank One Corp. and Strong Financial Corp. funds. Spitzer has cited other studies by Zitzewitz to tally the financial consequences to ordinary investors and said, in announcing the charges against Siphol Tuesday, that more criminal charges were sure to come.
The mutual funds have denied illegal activity, and other mutual and hedge funds have been subpoenaed in the case.
"It certainly is worrisome to see indications of more late trading going on," said Russ Kinnel, director of funds research at Morningstar Inc. "It suggests there is work for regulators to do, and that mutual fund companies need to tighten up compliance to make sure it doesn't happen."
