Two Mass. Employees Caught Market-Timing Mutual Funds

November 13, 2003 ( - If Massachusetts Treasurer Timothy Cahill was looking for international mutual fund market-timing, he didn't have to look far.

The two former state employees, Jerome and Susan Eng, reportdly made more than 100 trades this year between international stock funds and money market accounts.   Of those, at least two dozen of these transactions were conducted in recent weeks, as market-timing and late-trading scandals dominated the business pages (See  Market Timing Leads to “Late” Departure of Putnam Fund Managers ), according to a Boston Globe report.

After learning about the trading activities in the Engs’ deferred compensation account, the former employees were ordered to stop the practice, which is not forbidden by current state rules.  However, an aide to Cahill acknowledged that the state employee deferred compensation plan in which the Engs had their account did not have a policy against market-timing trades. And, as Jerome Eng told the Globe, the couple’s trading “wasn’t anything illegal. It should be their fault for allowing that.”

The Engs ‘ trading was detected in late September by Capital Guardian Trust Co., which manages an international equity fund for the state deferred compensation plan. A further review determined the couple traded in and out of the Capital Guardian fund and another international fund managed by Barclays Global Investors.

In response to this discovery, Massachusetts sent a certified letter from Cahill’s legal counsel asking the couple to “cease and desist from engaging in this trading practice.”   By the time the letter was received by the Engs on October 30, Jerome said he and his wife had already halted the practice.   Additionally, First Deputy Treasurer Doug Rubin said his office would develop a policy toward excessive short-term trading in the $2.9 billion plan over the next two months, as well as a plan to halt such trading.  

“Everyone’s struggling through these market timing issues” since the issue engulfed the mutual fund industry in scandal, Rubin told the Globe. “We think from a fiduciary standpoint, we have a responsibility to protect other people in the plan” from excessive trading.

Even though market timing is not illegal, it is generally frowned upon.   In fact, most mutual funds say they discourage the activity – the rapid trading in and out of mutual funds to take advantage of inefficiencies in the market – because it allows timers to make money while diluting the value of long-term investors’ shares.  

The issue of market-timing and so-called “late trading (mutual fund buy/sell orders placed after the 4 p.m. market close) have drawn the increased scrutiny of regulators in recent weeks as the focus of government investigations has been on whether mutual fund companies allowed either employees or outside investors to conduct repeated trades despite explicit policies prohibiting them. Recently for example,Massachusetts regulators filed civil securities fraud charges against Putnam Investments for, among other reasons, allowing members of a New York trade union to make hundreds of trades in and out of its international funds over a three-year period (See   Union K Plan Trading Activity Leads to Putnam Fund Probe).