The

OpenFund

takes a novel approach to the usually clandestine world of mutual fund investing. It publishes its positions -- and even its trades -- in real-time, leaving all its choices open to an unusually high degree of public scrutiny. Ironically, though, it's this openness that has left it in a potentially sticky situation.

Last September, the OpenFund bought stock in a company called

Wave Systems

(WAVX)

six to 12 days before Peter Sprague, Wave Systems CEO and a financial backer of the company that runs OpenFund, sold Wave Systems stock. Sprague also is chairman of a "Think Tank" on the fund's Web site, an informal group of business gurus who discuss investing issues on the site's message boards. Wave Systems manufactures a chip that monitors the amount of time a user stays online or interfaces with a piece of software, a device that's been likened to a digital postage meter.

Everyone involved says there's nothing wrong with these transactions, and they note that the share amounts were small, meaning it was unlikely that the OpenFund's purchases pushed up Wave Systems stock. The OpenFund's purchases were posted on its site. And from the beginning of its operation, OpenFund has disclosed Sprague's affiliation with the fund on its site and listed his status as Wave Systems CEO.

But the transactions raise conflict-of-interest questions for the OpenFund.

Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I., who hasn't done work for the OpenFund, says appearance is everything in the staid mutual fund world, and this is especially true for the OpenFund, given its mission.

"To me, you want to be pure as the driven snow, and what you're talking about is dead center in the conflict world," Bobroff says.

Donald Luskin, a co-founder of

MetaMarkets.com

, which runs the OpenFund, says the OpenFund acted independently. "The important point is he

Sprague has absolutely no influence whatsoever over what this fund does," Luskin says. "That's really all you need to know."

Sprague says he never considered his actions and those of the fund to be a problem. "I suppose one could say there was a conflict of interest, but it never occurred to me at any point in the process or to anybody else," Sprague says. "Wave's rise and

the fund's purchase had nothing to do with the overall effect of Wave in the marketplace."

Once Upon a Time

The story starts when Sprague, former chairman of

National Semiconductor

(NSM)

, was approached by an old family friend, Davis Nadig, about an idea for a new mutual fund. Nadig, a former executive at

Barclays Global Investors

, was partnering with Luskin, also a Barclays alum, to launch a fund that would leverage the Internet to communicate with shareholders like never before. It would cull investment ideas from shareholders and post all of its trades on its Web site.

Sprague liked the idea so much that he says he decided to call some of his own high-powered contacts, including Don Weeden of trading firm

Weeden & Co.

, which helped back

Reuters'

(RTRSY)

Instinet

. Futurist Nicholas Negroponte, author of the technophile cult classic

Being Digital

, joined in the company's funding as well. Sprague says he invested $200,000 to $300,000 of his own money.

By September, OpenFund was ready to launch, and it started building its initial portfolio. On Sept. 2, OpenFund started buying Wave Systems stock on the open market, according to the trading diaries on its Web site.

"We bought this off a strong rebound from earlier lows, grabbing 4000 at 8 1/16," Nadig wrote on the site.

On Sept. 7, MetaMarkets put out a press release announcing the formation of the "Think Tank" that would discuss investing issues on the site. Sprague was named chairman.

On Sept. 8, the OpenFund bought another 4,000 shares of Wave Systems at 9 3/16, 12% more per share than it had paid the week before.

Then, on Sept. 14, Sprague sold 10,000 of his Wave Systems shares at 9 1/2, worth a total of $95,000. (He was selling shares from his long-term holdings.) Sprague says the timing of that sale was a coincidence, and that OpenFund's purchase of the shares wouldn't have moved the stock anyway because they were so small. The fund has just $22 million in assets, and Wave Systems has a daily trading volume of about 815,000 shares.

More Buying

OpenFund continued to buy the stock throughout September, October and November, eventually accumulating a total of 13,000 shares. Since his sale, Sprague has registered to sell 65,000 more shares. Sprague says the registration was needed to convert some class B shares to class A shares, and doesn't necessarily mean he will sell. Since the OpenFund first bought Wave Systems shares, the stock has seen a 105% gain.

Gene Golhke, associate director in the

Securities and Exchange Commission's

Office of Compliance, Inspections and Examinations, says mutual funds need to be careful when dealing even with potential conflicts. "There's definitely the issue of appearance," says Gohlke, who wasn't speaking specifically about the OpenFund.

"When we do the inspection of a fund, we try to look at all the possible relationships, and we look for investments that seem inappropriate," Gohlke adds. "If we see these types of things that you've been describing, we would certainly look very closely at them to determine if we need to look further, ask further questions and look for inappropriate trading patterns."

Sprague, meanwhile, says he acted in good faith.

"You could create a pattern that, without the other facts, makes it look absolutely like a cause-and-effect scenario, like I bribed the guys at MetaMarkets by investing in them so that they would then buy my shares," Sprague says. "But I don't think it's a fair depiction of what happened."

And Luskin says OpenFund considered its actions carefully before buying the stock. "Long before making that investment, we discussed it with our counsel," he says. "They gave us very clear, common-sense guidelines which we follow, which are all about full disclosure. Sprague's biography and his affiliations have been posted on the site from day one."