The mutual fund scandal isn't over by a long shot, and when it's done, more than a few of the culprits will go to jail, according to the man who got it rolling.
New York Attorney General Eliot Spitzer said more firms and "many more" individuals will be indicted in the course of investigations into the mutual fund industry.
At a conference on corporate governance sponsored by the
New York Society of Security Analysts
, Spitzer today cited
Securities and Exchange Commission
figures that said 25 % of brokers helped customers engage in late trading of mutual funds.
"Think of the number of cases that will churn through the system," he said, promising that stiff penalties would follow.
"Those settlements will and should be painful for those who have failed to fulfill their fiduciary duty," he said. "I believe there will be jail sentences meted out it due course. There will be entities that no longer exist when we're done, and individuals at the top of those entities will face criminal sentences."
Though he gave no timetable for the completion of the investigation, he said he believed all aspects of U.S. markets would be better off, and that mutual funds would be more responsive to their investors. He criticized a system that placed a priority on managers' profits and said that any industry-wide resolution would have to address the issue.
"I will not settle any case unless I'm sure some measure has been taken to relieve the pressure to generate fees that wind up in the pockets of those who don't deserve it," he said.
Spitzer's remarks echoed earlier comments by Jack Bogle, the founder of
, who is now a high-profile investor advocate. Bogle said mutual fund companies should be "mutualized," making the shareholders the owners of the management companies.
He assailed the system in which large corporation own mutual fund companies as leading to "a truly bizarre system of mutual fund governance." Bogle said mutual funds encourage poor corporate governance by failing to demand it of their portfolio companies, and because they are incapable of instituting those standards in their own businesses.
"Most mutual fund managers seem more attuned to improving their own financial rewards than those of the millions of investors who have entrusted to them their hard-earned savings," he said. "A 100% owner brooks no interference with his will."
Spitzer said later that Bogle's example was a lesson on the insistence of good corporate governance, but that his early warnings had caused him to "be portrayed as something of a crank," who was later proved correct.
In the boom years, Spitzer said, "nobody was in a position to rock the boat or challenge" a flawed system that was making everyone rich. He blamed individual lawbreakers, compliance departments, self-regulatory agencies such as the National Association of Securities Dealers and the Investment Companies Institute.We also had failure on the part of the regulators. We had failure on the part of legislators," Spitzer said. "Think of all those layers of failure that allowed us to get to this point."