Mutual fund managers' backdoor deals dilute what's left for the rest of usIt is a strange time when the usually dry pages of The Wall Street Journal provide fodder for the novelist or the moralist. This is not Enron time, when a WSJ reader groaned at the piracy and greed of Ken Lay and his colleagues. But this week's reports surrounding certain mutual funds are worthy of a creative writer.

The WSJ has explained the game well. In Monday's edition, Tom Lauricella wrote that, "The chance for rapid speculative profit arises from the common mutual-fund practice of assigning a value to fund shares only once a day, usually at 4 p.m. Eastern time. But the value of securities those fund shares represents changes continuously. That means that fund-share prices often are out-of-sync with the underlying assets - a discrepancy that big, sophisticated investors can exploit. Technological advances and the globalization of markets have opened many more such opportunities."

Prosecutors and investigators have learned that certain fund managers have left a figurative back door open for large investors to reap profits that are inaccessible to the small mutual fund investor. Those extracurricular profits, gained through late trading or market timing by large, privileged investors, deplete the mutual fund pool and thereby dilute what's available for everyone else.

As with Enron, investment house gatekeepers have quietly established one set of rules for small investors and another for the pirates.

This is not academic stuff. The mutual fund shenanigans might be an insider's game, but it's your money they are playing with. That's why there is talk of class-action reparations. Other consequences for the funds are also rather grand. The WSJ reported that four funds implicated by New York Attorney General Eliot Spitzer's investigation saw fund withdrawals of $7.9 billion in September, representing 1.85 percent of their assets.

Small investors are once more indebted to Spitzer for uncovering this fleecing. Meanwhile, the Securities Exchange Commission is far behind. SEC Chairman William Donaldson assures us that his agency is on the case. But without Spitzer, there would be no case.

Those who resent Spitzer's aggressiveness and publicity, because he is a Democrat, don't realize the potential earthquake that could result from having a market as broadly based as mutual funds come apart. As former SEC chairman Arthur Levitt told the WSJ: "This seems to be the most egregious violation of the public trust of any of the events of recent years. Investors may realize they can't trust the bond market or they can't trust a stock broker or analysts, but mutual funds have been havens of security and integrity."


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