Things had to get better in 2003. That was the mantra heading into the year. After all, the market was entering its third consecutive down year and still reeling from the fallout from the bubble-burst and the ongoing war on terror. Logic only had it that things had to move upwards, because they sure couldn't get worse.

The war in Iraq buoyed the economy and things appeared to be on the upswing for the fund industry. Regulators seemed to be more focused on hedge funds than on mutual funds and the Investment Company Institute even successfully lobbied against legislation that would have required mutual funds to provide individualized fee statements. Sure, clear sailing seemed far ahead.

Then the Pearl Harbor of the mutual fund industry hit. However, this day of infamy was Sept. 3, 2003, a day that will surely mark the beginning of a new era of accountability. While we're still in the midst of the fund scandal and new revelations and twists come pouring in daily, 2003 produced a handful of winners and a slew of losers.

Here is Money Management Executive's Fund Folly Awards of 2003.

And the Award Goes to...

Fidelity Investments and

Smith Barney

Following the first few months of an apparent economic turnaround, Smith Barney and Fidelity were back to their old tricks, touting recent performance in ads in places like The Wall Street Journal (see MME 8/8/2003). Over the summer, Fidelity bragged about its Fidelity Leveraged Company Stock Fund and its 44.9% year-to-date, while Smith Barney ran a series of ads.

These ads neglected the lessons learned during the bear market, fed the dangerous return-chasing mentality, and promoted a philosophy that is contrary to the long-term, buy-and-hold, outlook that mutual funds are supposed to possess.

And the Award Goes to...

Barry Barbash, Partner Shearman & Sterling

Dishonorable Mention...

Stanford professor Eric Zitzewitz

Marsh & McLennan Companies (MMC), parent company of Putnam Investments hired Barry P. Barbash, a partner at the law firm Shearman & Sterling and head of the firm's asset management group, best-known for having once served in Paul Roye's job at the SEC, to conduct reviews of the firm's policies and controls. As former director of the SEC's division of investment management, Barbash was among the most senior financial services regulators in the country, with principal oversight over the mutual fund industry.

However, it must be noted and cannot be forgotten that during his tenure at the SEC in mid to late 1990s, Putnam was having problems. Employees were putting their own interests ahead of those of investors (see MME 11/17/03.) Same goes for a large number of fund companies in the industry.

Ironically, while the SEC did little to curb these practices during Barbash's watch, he now finds himself on the payroll of one of the biggest offenders in the fund scandal.

However, despite what CNBC has dubbed him, just don't call him "Mr. Fix It." Barbash says he was simply retained by MMC to review its policies and procedures.

And deserving of an dishonorable mention in this category is Eric Zitzewitz, the Stanford University professor who researched and wrote a highly publicized report detailing the negative effects on market timing on long-term investors. Zitzewitz, who said market timers cost shareholders $5 billion per year, was actually involved in his own rapid in-and-out trading scheme over a three-month period this past summer. So much for glass houses.

The trades he reportedly conducted were not illegal, but did result in disciplinary action at UBS AG, the firm handling his account. Zitzewitz ceased these trades in September. Reports indicate he was not aware of UBS' policy regarding timing at the time he conducted the trades.

And the Award Goes to...

Bank of America & FleetBoston Financial

One of the four mutual fund firms originally implicated by Eliot Spitzer on Sept. 3, BofA managed to deflect a lot of the public scrutiny by purchasing FleetBoston Financial Corp., creating what will be the second-largest bank and fourth-largest fund complex (see MME 11/03/2003.) The merger brings a number of fund families under BofA's roof, including the Columbia funds, which could provide BofA with notable options should it decide to rebrand the scandalous Nations Funds name.

And the Award Goes to...

SEC & Putnam Investments

In a highly criticized move, the SEC announced that Putnam Investments had settled with the federal regulators and promised to reform its operations and repay cheated investors. However, Putnam did not admit any wrongdoing, and the SEC had not set a dollar amount for the penalty. Judging from Alliance's $600 million settlement, the bar may now be set quite high.

State regulators were extremely unhappy with the Putnam settlement, as New York AG Eliot Spitzer called the deal "a joke" and Massachusetts Secretary of the Commonwealth William Galvin was "outraged at the SEC," saying "Putnam has not come clean."

By allowing Putnam to enter into a deal where it did not admit wrongdoing, the SEC missed an opportunity to let the industry know it means business.

And the Award Goes to...

Matthew P. Fink, President, ICI

There is nothing like having your head in the sand during the midst of one of the worst scandals in the history of the mutual fund industry.

"We are serving shareholders well because the mutual fund industry has avoided the abusive practices that betrayed investors in other parts of the marketplace," Matthew P. Fink, ICI president, told attendees during a speech given at the 2003 Mutual Funds & Investment Management Conference in Palm Desert, Ca. in March (see MFMN 4/07/2003).

"Most importantly, we are serving shareholders well-and will continue to serve them well in bull and bear markets to come--because the interests of those who manage mutual funds are so well aligned with the interests of those who invest in mutual funds."

This is clearly not the case.

And the Award Goes to...

Rep. Richard Baker

The Phoenix Award goes to Rep. Richard Baker (R-LA) for resurrecting the Mutual Funds Integrity and Fee Transparency Act of 2003 from the ashes. The bill was left for dead on the floor of the House after it was severely watered down in order to get out of committee. Successful lobbying on behalf of the ICI got individualized fee statements out of the legislation. Requiring the board to have an independent chairman was also nixed.

However, the "Baker Bill" as it is also known, was approved by a 418-2 vote in November, complete with new provisions prohibiting fund insiders from market timing and requiring orders to be placed prior to the 4 p.m. deadline (see MME 11/24/2003). The bill addresses important topics such as soft-dollar arrangements and asks the SEC to clarify fair value pricing of NAVs. It is waiting approval in the Senate.

And the Award Goes to...

New York Attorney General Eliot Spitzer

Going over the head of the SEC and taking on the $7.2 trillion mutual fund industry for its misdeeds and deceptive practices definitely classifies Spitzer as ambitious.

While filling newsprint with colorful soundbytes, the politically motivated attorney general kicked off the investigation that has left the fund industry disheveled and scurrying to check its own books.

If the record-setting $1.4 billion Wall Street analyst settlement wasn't enough to grab corporate America's attention, Spitzer is back for more - maybe even $10 billion worth.

And the Award Goes to...

Larry Lasser and

Richard Strong

Both disgraced. Both forced to resign their posts with their fund companies. Both front and center in the heart of the biggest scandal to grip this industry. Not much else to say.

And the Award Goes to...

Janus Capital

After a number of high-profile exits in recent years, devastating losses in its funds following the implosion of the dot-com, and the protracted battle with its parent Stilwell Financial, Janus told the fund world it was poised to reenter the world of the living.

Then Helen Young Hayes, one of the firm's most recognizable faces from the glory years and managing director of investments at Janus, announced her retirement (See MFMN 4/28/2003).

Over the summer, Janus announced a planned ad campaign to covey the makeover at the firm. It was set to run during the fourth quarter. Then Janus showed up as one of four offending firms in Eliot Spitzer's initial complaint against hedge fund Canary Capital. Janus International's then-CEO Richard Garland had his internal e-mails, in which he contemplates taking market-timing business, enlarged and displayed for the world to see. Morningstar publicly condemned the fund company and suggested investors sell out of Janus funds.


It's been a long December, but at this point there isn't much reason to believe that maybe this year will be better than the last. In 2003, the scandal only played out in public for four months. As for 2004, all twelve months are filled with scandal possibilities and a lot more fund companies for regulators to sort through.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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