The Five Dumbest Things on Wall Street This Week

1. A Green Light for the Mutual Fund Red Light District

You've got to hand it to the hardworking folks in the mutual fund industry: Even in a holiday-shortened week, they managed to squeeze in some bad news.

(Which reminds us: We're still accepting entries for our latest reader contest: "How to Fix What's Broken in Mutual Funds." If you've got any oddball, outlandish, bizarre and/or unworkable ideas about how to prevent late trading, market-timing, lax oversight and/or incompetent management of mutual funds, send them to the research lab in care of [e-mail]. The winner will receive the gratitude of all mankind. Plus a free book.)

Anyway, this week's depressing disclosure about mutual funds -- which we at the Five Dumbest Things Research Lab used to think were level-playing-field, equal-opportunity-type investments -- came from Invesco.

The fund giant, a subsidiary of Amvescap (AVZ Quote - Cramer on AVZ - Stock Picks), announced Monday evening that the staffs of both the Securities and Exchange Commission and New York Attorney General Eliot Spitzer have told Invesco they intend to recommend civil enforcement actions against Invesco "based on market-timing activities by certain investors in its mutual fund shares."

But here, we think, is the interesting part. Keeping in mind that mutual fund companies generally limit market-timed trading of their shares -- or at least say they do -- Invesco disclosed Monday its novel strategy "to protect Funds from harmful short-term activity."

And what was that strategy? Why, it was to permit short-term activity.

Yes, Invesco evidently decided it was a losing game to out-and-out forbid market-timing, which it refers to as "investment models calling for frequent asset allocation."

Instead, Invesco "determined it could better control certain asset allocators and momentum investors by restricting them to certain funds, which, in its judgment, would not be adversely affected by their activities," the company said Monday. "This was done after consultation with investment professionals and included restrictions and limitations designed to protect the Funds and their shareholders."

Hmmm. Here we have someone controlling activity that could be harmful to the community at large by limiting such activity to a particular, tightly regulated area.

Viva Market-Timing! Invesco's legal gamble

You know, maybe that's not so Dumb after all. You can gamble in the U.S., but only in Las Vegas, Atlantic City or some Indian reservation somewhere. You can visit a prostitute, but only in certain counties in Nevada. You can buy a six-pack of beer in Pennsylvania, but only from a bar.

Of course, the next question raised by all these policies is whether the restricted activity should be permitted at all. Is market-timing somewhere in the realm of beer, gambling and prostitution? Or should it be grouped with smoking crack cocaine -- an activity that's pretty much illegal everywhere?

Unfortunately, we at the lab don't have the answers to this one. Just the questions.

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