MUTUAL FUND INDUSTRY Fines loom as probe into scandal widens

Mutual fund managers reaped more than $50 billion in fees last year.
WASHINGTON (AP) -- Congress is examining a widening mutual fund scandal that has implicated top industry executives, as regulators investigate and draw up a major overhaul of the $7 trillion industry with a traditionally pristine image.
Companies must be forced to pay back to investors the hefty fees received for managing mutual funds while they allowed fund trading abuses to occur, New York Attorney General Eliot Spitzer said Sunday in an interview with The Associated Press.
"If they're expecting to get settlements [with regulators], they're going to have to give much more back than just [investors'] losses," Spitzer said. "They're going to be paying stiff fines and giving back their management fees. They violated their trust with the American investor."
Management fees reaped by mutual fund companies totaled more than $50 billion last year, Spitzer noted.
Testimony
Repayment of management fees would be in addition to restitution to shareholders of profits made from alleged improper trading, Spitzer said in testimony prepared for a Senate Governmental Affairs subcommittee hearing today.
The Securities and Exchange Commission's enforcement director, Stephen Cutler, was set to testify as well. A House subcommittee also is holding hearings on the burgeoning scandal this week.
Cutler planned to present a survey detailing widespread industry abuses, including a finding that one-quarter of the nation's largest brokerage houses helped clients illegally trade mutual funds after hours, The Washington Post reported.
Resignation
In the latest jolt, Strong Mutual Funds said Sunday that its board chairman, Richard S. Strong, had resigned amid multiple investigations into his personal trading of the company's funds. Last week Strong acknowledged trading in some of the Menomonee Falls, Wis., firm's funds and said he would reimburse investors for any losses they may have sustained because of his trades.
Strong is under investigation by the SEC, Spitzer's office and Wisconsin financial regulators for alleged improper trading that officials say may have benefited him and his friends and family.
Spitzer has lashed out at the SEC for what he calls its failure to detect abuses and act quickly. "Heads should roll" at the federal agency, he says.
Eclipsed for months by Spitzer in the pursuit of conflicts of interest and abuses by Wall Street investment firms, the SEC jumped into the mutual fund investigation in early September. Dozens of firms have been subpoenaed, including Fidelity Investments, Janus Capital Group, Morgan Stanley and Vanguard Group.
It was Spitzer who first raised the charge that preferential trading deals for big-money customers at mutual fund companies could be siphoning billions of dollars from ordinary investors.
Fraud charges
In the latest and sharpest enforcement action, the SEC and Massachusetts regulators brought civil fraud charges last week against Putnam Investments, the nation's fifth-largest mutual fund company.
Two senior investment managers at Putnam were charged with using improper trades to profit personally from mutual funds they oversaw.
Chief Executive Lawrence J. Lasser will resign from Putnam Investments, according to published reports.