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September 04, 2003

Somebody oughta go to jail for this one...

I'm not a big fan of Elliot Spitzer.   Like most state Attorney's General, he is an ambitious pol who spends more time worrying about how he can use the courts to advance his political career rather than enforcing the law.   I also think that his persecution of the big brokerage firms over their bubble-era stock research reports was pretty low, what with the selected leaking of internal emails and litigating via the newspapers.   However, Spitzer's announcement yesterday about hedge funds late trading in large mutual funds was pretty shocking stuff, at least to naive old me.

Essentially, what these guys were doing was buying or selling mutual fund shares after the markets closed at 4pm in a way that was not available to other shareholders.   (If a typical investor put in a buy or sell order after 4pm, the trade would be executed at the next day's closing price; the hedge funds were allowed to trade using today's closing price.)   If there was market moving news announced after the close, these hedge funds could profit from this information by buying or selling at the "old" prices, thereby locking in profits at the expense of the ordinary shareholders in the fund.   As Spitzer aptly put it, this was like allowing "betting on a horse race after the horses have crossed the finish line".   This is about as clear-cut a case of stealing from small shareholders that I've ever seen.   And, to add insult to injury, the mutual fund companies were allowing this to take place because they were getting paid to do so.   Outrageous.

Today's WSJ has the best coverage of the story, with a clear explanation of what was being done here and here.  (Subscription required.)

If I owned funds from any of the mutual fund companies implicated in this mess (Bank of America, Janus, Strong and Bank One), I'd be pissed as hell.   I would also cash out of these funds pronto, as a matter of principle.

September 4, 2003 at 12:39 PM | Permalink

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