Updated from 11:35 a.m. EST
Another week and the mutual fund trading scandal shows no signs of letting up, as more Wall Street firms see their reputations muddied.
Securities regulators on Monday announced a $50 million settlement with
, following a lengthy investigation into the firm's mutual fund marketing practices, including the deliberate pitching of more costly funds to its customers.
Regulators charged Morgan Stanley accepted "substantial fees'' from 14 mutual fund families to aggressively push those funds to its customers. The big Wall Street firm also is accused of urging its customers to buy shares in the firm's most expensive in-house mutual funds.
Morgan Stanley neither admitted nor denied the charges filed by the
Securities and Exchange Commission
and the NASD. But Morgan Stanley Chairman and Chief Executive Officer Philip Purcell, in a prepared statement, said, "I regret that some of our sales and disclosure practices have been found inadequate.''
As part of the settlement, Morgan Stanley will distribute a "Bill of Rights'' to its mutual fund customers, which will describe in plain English all the costs, fees, benefits and disadvantages of different mutual fund offering.
last week fired four brokers and two sales assistants because of their alleged role in the mutual fund trading scandal, according to
The Wall Street Journal
. The employees were fired on Nov. 12, after being suspended by the Wall Street firm on Oct. 24.
reported last week that investigators are turning up the heat on Bear Stearns because it processed and executed trades for many of the hedge funds and small brokerage firms in the middle of the trading scandal. A recently filed lawsuit in Manhattan federal court alleges that Bear Stearns played a pivotal role in the trading scandal by making it easier for hedge funds and brokerages to engage in improper trading of mutual funds sold by
and Putnam Investments, a division of
Marsh & McLennan
A Bear Stearns spokeswoman declined to comment.
News of the expanding investigations weighed down shares of brokerage stocks, with the AMEX Securities Broker Dealer Index dropping 1.8% in midday trading.
said Monday it is delaying the filing of its third quarter 10-Q in order to take a $190 million charge in connection with its role in the mutual fund scandal. The financial services firm is being investigated by both New York Attorney General Eliot Spitzer and the Securities and Exchange Commission and said there's a good chance regulators will soon file charges against the firm.
Over the weekend,
also released more information about its involvement in the mutual fund scandal. The big online brokerage said its own internal investigation has found improper trading by five "institutional clients" in its mutual funds. The firm also said that it fired two employees who tried to destroy several email messages.
The mutual fund investigation is wide-ranging and now encompasses more than a dozen Wall Street brokerages, mutual funds and hedge funds. The investigations are being led by Spitzer, the SEC, the NASD and Massachusetts securities regulators.
The main focus is on the improper trading of mutual fund shares through either market timing or late trading. Investigators also are looking into a failure by many fund companies to disclose hidden charge and fees and incentives they receives to pitch certain funds.
Market-timing is an arbitrage strategy in which time differences between the closing of U.S. and foreign exchanges are exploited. While market-timing is technically legal, most mutual funds say they prohibit it because the rapid in-and-out trading by hedge funds and other investors can dilute the value of a fund's holdings and hurt other investors. That's one reason regulators are cracking down on funds that permitted some investorsto engage in market-timing.
Late-trading is an even more serious offense, because it's an activity in which a mutual fund company permits a favored customer to buy shares that were priced prior to the release of market-moving news, giving the investors an unfair advantage.
Monday's settlement with Morgan Stanley focused on a different problem: brokers pushing their customers into buy the most expensive mutual funds. Regulators found that Morgan Stanley brokers earned bigger commissions for getting their wealthy customers to buy so-called Class B shares of the firm's in-house mutual funds.
In recent years, Class B shares increasingly have drawn scrutiny from regulators at the SEC and the NASD because they tend to be the most costly mutual fund products.
On the surface, Class B shares often look like a good investment because investors generally don't pay any upfront sales charge, or "load." But investors in Class B shares often pay higher annual fees than on shares with upfront sales charges, fees that often exceed any initial savings an investor might reap. Additionally, brokers often waive or reduce the upfront fees on so-called Class A "load" shares for large investors.
Morgan Stanley is facing a host of arbitration complaints filed by customers who contend they were sold Class B shares without knowing all the risks. A class-action lawsuit raising similar allegations also has been filed by some of its customers.
The settlement with regulators should give a boost to those customer complaints. Additionally, the $50 million in restitution and penalties Morgan Stanley is paying will go into a special fund to benefit the firm's mutual fund customers.
The deal with the SEC and the NASD, however, doesn't end Morgan Stanley's exposure in the mutual fund scandal.
The firm still must deal with civil charges filed against it by Massachusetts regulators, who allege that Morgan Stanley failed to inform its customers about an internal contest it ran to promote sale of its in-house funds. Spitzer's office also is investigating Morgan Stanley to determine whether it permitted hedge funds to engage in improper trading activity in its funds.