When I worked on Wall Street I saw the back office operations of a couple of mutual fund custodians. I can tell you that allowing the occasional "late trade" was considered good customer service.
Appalled by Betrayal of Fund Investors
By DIANA B. HENRIQUES
THE American mutual fund industry will have its 80th birthday in a few months, but no one is much inclined to celebrate. And no wonder: the $7 trillion business, born with the formation of the Massachusetts Investment Trust in Boston in March 1924, is slogging through the worst scandal in its long history.
So far, some of the biggest, oldest and proudest names in the industry - MFS, founder of that first fund; Putnam Investments; and the Janus Capital Group, among them - are facing lawsuits or investigations, and no one is sure when the last muddy shoe will drop.
The technical details may seem a bit arcane to modern investors who can conjure up stock quotes at 2 a.m. on their BlackBerries. Under laws adopted in an era of slower paperwork and more primitive technology, funds are priced once a day, typically at 4 p.m., and all orders received before the deadline are filled at that price. Now, with funds investing globally and market-moving news breaking on a 24-hour cycle, this quaint practice can leave funds with prices that are out-of-date by the legal cutoff.
Exploiting those stale prices by quickly buying shares and cashing out when prices adjust is called market timing. While not illegal, it diverts profits that fairly belong to long-term investors, and it violates the bylaws of many of the funds accused of allowing big hedge fund customers, or their own executives, to do it. Submitting orders after the deadline but getting them filled at the deadline price is called late trading, and it is illegal - although several big hedge funds have been allowed to place late trades as part of their profitable forays into public mutual funds.
To those steeped in the fund industry's traditions, saying the scandal is about late trading and market timing is like saying the scandal at Enron is about how the books were kept. In each case, they say, the larger sin was that trusted, powerful people betrayed those who trusted them in exchange for more money or more power. And it is the betrayal of the trusting middle-class American investors that seemed to weigh most heavily on the minds of the seven industry leaders and former industry regulators who were asked for advice on how regulators, the industry and fund customers should best navigate through this quagmire.
