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Five Dumbest Things on Wall Street: Nov. 6

Value Line's Sin of Commission

Value Line (VALU - Get Report) bills itself as "the most trusted name in investment research." Well, that trust has clearly bitten the dust.

Value Line, its now former CEO Jean Buttner and former compliance chief David Henigson will shell out $45 million to settle allegations the firm charged more than $24 million in phony commissions on mutual fund trades. The Securities and Exchange Commission said Wednesday that the investment advisor and its former executives didn't admit or deny wrongdoing. In addition, Buttner and Henigson were barred from working in the securities business or as officers or directors of any public company.

Value Line is paying a $10 million civil fine and about $24.2 million in restitution plus $9.5 million in interest. Buttner and Henigson are ponying up $1 million and $250,000, respectively, for a scam that allegedly ran from 1986 to November 2004. During that period, Value Line redirected a slice of the mutual fund trades to its brokerage business, Value Line Securities Inc., in a so-called "commission recapture program."

You've heard of "sins of omission"? Well, Value Line's was a sin of commission.

Here's how their scheme allegedly worked. Unaffiliated brokers would execute trades on behalf of Value Line at a discounted rate of a penny or two per share. But instead of passing the savings on to the mutual funds like they were supposed to do, the SEC says Value Line had the outside brokers bill the funds for a portion of that commission and then "rebate" the rest to Value Line Securities.

Altogether, Value Line, which describes itself on its Web site as "synonymous with trust, reliability and objectivity," pocketed more than $24 million in phony brokerage commissions without performing any real brokerage services for the mutual funds on those trades, according to the SEC.

In the end it was a matter of trust. And Value Line broke it.

Dumb-o-meter score: 75 -- Value Line is literally a trust buster.

-- Written by Gregg Greenberg in New York
Before joining, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.
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