We have a right to expect
better
I'm (almost) sorry to say that my initial reaction to
New York Attorney General Eliot Spitzer's allegations that
a hedge fund (Canary Capital Partners LLC) had been
involved in financial misdeeds was rather blasé. It is
perhaps an occupational hazard that one becomes immune to
that sort of thingbut, believe me, a hedge fund cheating
investors out of money is not exactly unheard of these
days, certainly at the retail level.
No, the really nasty crimes generally require elements
of complicity and conspiracy and, as I pored through the
Spitzer complaint, it was shockingly apparent that this
case had plenty of both. Moreover, in this case,
unfortunately, it may have implications for the retirement
business as well, since both mutual funds (the participant
investment vehicle of choice) and at least one custodian
have found their way into the headlines as a result of
their alleged roles in the transactions.
What is most troubling to me is not that the hedge fund
in question tried to "market time" to take advantage of the
market's inefficiencies. Many try to and, while the
practice isn't technically illegal, most mutual funds claim
that they frown on it, and reserve the right to impose
extra fees, or even reject such trades, if suspected.
Nor am I ultimately as concerned about the fact that
some of these trades were processed after the 4 p.m.
cut-off. I would, however, make a clear distinction between
trades processed after the cut-offwhich the vast majority
of 401(k) retirement plans do, and do so legallyand trades
illegally placed after the cut-off. Canary may well have
done the latter, since at least one company allegedly
placed a trading terminal in Canary's offices that would
reportedly allow them to do just that.
No, what distresses me most is the apparent breadth of
awarenessand encouragementof the practices within at
least one of the mutual fund complexes. Goodness knows,
we've seen situations where one or two senior financial
executives "cooked the books," circumstances where it
appeared that auditing and reporting were (perhaps
criminally) sloppy, even instances where auditors seem to
have worked "aggressively" with their client to circumvent
the boundaries of accepted standards.
However, the Spitzer allegations, if true, suggest a
level of greed and complicity the likes of which we haven't
seen in some timeperhaps not since the robber barons of
the last century. As portrayed in the complaint, these are
senior executives in large, reputable financial firms who
sanctioned the clear and repeated violations of their own
trading policies, written policies established for the
protection of the investors who placed their faithand
their savingswith those firms. Their profits, and the
profits of those who took advantage of the system, came
from the pockets of those who abide by the rules.
These executives deliberately chose to violate their own
policies, no doubt comforting themselves with the notion
that their actions were "not technically illegal."
Perhaps not, but they were wrongand we deserve
better.
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