At Deadline - Fund Investigation Claims More Jobs at Bank One

Heads are rolling all over the mutual fund industry, as allegations that funds gave special trading privileges to big clients are rattling many of the industry's top firms, and some say this is still just the beginning.

"This could drag on for a very long time," said William Lewittes, head of mutual fund analysis at Value Line, because it could require investigating some 13,000 individual funds. It may also eventually lead directly to funds' boards of directors, he added.

Bank One has replaced two executives after an internal investigation uncovered that hedge fund Canary Capital Partners had been allowed to trade 11 of the company's One Group funds more frequently than other investors. One Group President Mark Beeson resigned, and Dave Kundert, executive vice president of the bank-holding company and head of its investment management group, will fill his place. Also out the door is John AbuNassar, head of the institutional asset management group, who was succeeded by Norm Cook, a managing director in the group. In addition, Bank One offered restitution for any losses shareholders might have incurred, and decided to terminate its contract with back-office specialist Security Trust Co., which processed the Canary transactions in One Group funds.

Of the three other mutual fund firms named in New York State Attorney General Eliot Spitzer's original Sept. 3 investigation, Bank of America and Janus Capital have also pushed out executives and pledged restitution to any shareholders who lost money because of alleged improper trading.

It's no surprise that the firms quickly identified scapegoats. Shortly after Spitzer made his announcement, mutual fund research leader Morningstar recommended that investors steer clear of the four mutual fund firms, and suggested that investor trust wouldn't be restored until the funds fired the responsible executives.

Still, some are not yet impressed with the fallout. "It's good that they're addressing these things after the fact, but I don't think it's adequate," said Roy Weitz, publisher of fundalarm.com. "The top people at Janus, at Bank of America, are still there. It's typical to cut the low-level people and beg for forgiveness."

Most recently, the SEC has also queried most of the mutual fund industry about whether they give big investors, like hedge funds, a privileged peek at their portfolio holdings, something that could qualify as trafficking in insider information.

It is beginning to look like no one is immune. Even Fidelity was subpoenaed by Massachusetts regulators this month. Massachusetts Secretary of State William F. Galvin is investigating whether salespeople at Fidelity, Franklin Templeton Investments and Morgan Stanley helped some Prudential brokers in Boston get around Prudential policies aimed at preventing market-timing.

Some of the most alarmist observers think the scandals will spark a mass investor exodus from mutual funds into cheaper vehicles like ETFs, or perhaps more stable products like separately managed accounts.

But others say that's unlikely. And while all four firms named in Spitzer's suit have been hit with a raft of redemptions since last month's revelations, the overall mutual fund industry has seen little outflow over the past five weeks (see related story, page one).

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