The SEC's top regulators have chastised mutual funds. State regulators have fired harsh salvos at them. And to put it quite mildly, the national press has gone to town.

Now, fund company executives whose firms have been implicated in the fund scandal are firing back with heavy-handed letters to their shareholders with more candor and criticism of regulators than previously seen.

Three open letters to fund investors have appeared on company Web sites and as a full-page ad in The New York Times recently, including ones from Fidelity Investments of Boston, Franklin Templeton Investments of San Mateo, Calif., and PIMCO of Newport Beach, Calif.

Fidelity Chairman and CEO Edward C. "Ned" Johnson III, who recently weighed in with his concerns over proposals to mandate that fund board chairmen be independent, has now also addressed the overall industry mess, cautioning legislators to tread carefully in areas they do not know well. Fidelity has not been implicated in the fund scandal.

Franklin and PIMCO, on the other hand, have refuted the specific charges that state regulators have levied against them. Both candidly talk about the particular arrangements state regulators have railed about.

The comments now emanating from fund companies are definitely stronger and more direct than those we have seen. Not only is the language powerful, industry insiders say, but the disclosure is more robust and more frank. It's not every day one gets a letter from Bill Gross, PIMCO chief investment officer, referring to "rascals."

Moreover, while companies were previously determined to distance themselves from the industry's misdeeds, now they are stepping right up to the plate to get their points front and center.

"These companies are not letting the issues define them. They are defining the issues," said Bill Blase, president of W.T. Blase & Associates in New York.

They "believe there is a need for proactive and emphatic stating of their positions, and reassurance that they are putting the interests of shareholders first," said Scott Tanner, principal of Millennium Media Consulting of Alexandria, Va. Given the rash of various allegations and the intense scrutiny of the media, fund companies don't want to leave public opinion to its own devices, he added.

"They want to get their messages out in a very structured and strategic way, and I think we will see more of this."

Stop the Siren Song'

Fidelity's Johnson cautioned that to cure the industry's ills, legislators will be required to exhibit "shrewd judgment." Quick fixes, intended to stop current mistakes or wrongdoing, could have unintended consequences, he said. "In addition, impractical and complex rules that don't apply to the entire investment industry could well put mutual funds at a disadvantage in attracting and holding talent, ultimately harming the interests of shareholders," Johnson said.

"Congress must make certain that it is informed about the intricacies of the entire mutual fund industry - not just one part of the business - to ensure that it is not tempted to regulate based upon the siren-song of self-interested individuals and groups," Johnson summed up.

He also offered up his ideas for curing what ails the industry. These include establishing a regulated central clearinghouse to handle all mutual fund trades, such as the structure that already exists under the Depository Trust & Clearing Corp., strengthening fair-value pricing and beefing up short-term redemption fees.

Although its executives are more accustomed to being the voice of commentary about the bond market, PIMCO is now on the defensive. In response to the civil lawsuit and a host of accusations filed by New Jersey State Attorney General Peter Harvey on Feb. 17, Gross and PIMCO CEO Bill Thompson soon afterward posted a letter to the PIMCO Web site: "Sometimes a cleansing process can go too far. . . . Allegations are different from facts."

Refuting charges that PIMCO allowed Canary Capital to execute 200 market timing transactions to the tune of a collective $4 billion, PIMCO's duo of Bills, Gross and Thompson, that is, openly admitted that they did business with Canary, but never engaged in a "sticky asset" quid pro quo arrangement.

"Yes, unfortunately Canary/Stern became an investor in our funds," Gross and Thompson admitted. "The investments we knew about, clearly acknowledged as timer' money and made under monitoring provisions, were made under an arrangement that did not violate the shareholder protection of our prospectuses," the letter added.

"In perfect hindsight, we wish we had never attracted the name Canary/Stern among our many thousands of loyal fund shareholders."

While other investment firms have largely acknowledged any suspect transactions in very generic terms, Franklin Templeton got down and dirty and provided investors with the details of its deal, albeit from its own perspective. "We are absolutely committed to keeping all clients, shareholders and employees up to date," said Lisa Gallegos, a spokesperson.

In response to charges levied against Franklin by the Secretary of the Commonwealth of Massachusetts on Feb. 4, Franklin offers up lengthy but direct explanations and a concise Q&A that addresses the issues head-on. The Web letter includes a link to the 18-page response to charges that Franklin filed with state regulators on Feb. 17.

Franklin is silent, however, on naming the two employees and one officer who have been put on administrative leave. The officer, believed to be William Post, was named in the state regulator's charges and appears to have resigned from the company this past December. Post had served as the president and CEO of the Northern California region of Franklin and as the vice president of Franklin Templeton Alternative Strategies, the firm's hedge fund unit.

While Franklin acknowledged that Las Vegas investor, and former president of Security Brokerage, Daniel Calugar, was allowed to execute market-timing trades of about $20 million in September and October of 2001, the portfolio manager of the Franklin fund being timed had been consulted in advance and concluded that trading would not be disruptive, according to Franklin's letter.

The $20 million represented only a fraction of the fund's total $8 billion, of which about $1.8 billion was generally held in cash. The transactions didn't harm investors other than Calugar himself, who suffered a resulting loss of about $700,000, the letter continued.

Franklin also refutes charges that the arrangement with Calugar required him to maintain $10 million in a new hedge fund-of-funds that Franklin Templeton created. Calugar, the initial investor in that hedge fund, "understood that the investments were independent of each other," noted the letter.

Franklin also dishes up details as to how, since 2000, it has put various programs in place to deter would-be timers. Ironically, Franklin's letter points to a lawsuit, filed against it in 2000, in which an investor claimed that Franklin unfairly restricted the trading in and out of its equity and money market funds.

While the suit, filed in October 2000 in Delaware District Court on behalf of First Lincoln Holdings, was later settled, it claimed that Franklin unfairly imposed certain restrictions aimed at suppressing trading which First Lincoln's subsidiary companies relied upon to manage risk and provide liquidity.

In these letters, at least, fund CEOs and CIOs have the last say.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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