Eroding ethics and codes of ethics clash every business day. It reminds me of a cartoon character who is torn between a little devil whispering nasty advice in one ear and a little angel appealing "do the right thing" in the other.
This week was no exception. Major mutual fund companies let a rich client bend the rules for profit, but other companies began disclosing new "codes of ethics" that their senior financial officers agreed to follow.
While federal regulators continue to nap, New York Attorney General Eliot Spitzer on Wednesday again took legal action against the Big Boys in the financial industry. This time, Spitzer nailed a hedge fund called Canary Capital Partners LLC with a $40-million fine for illegal trading schemes.
Spitzer's real target is the nation's mutual fund industry. Until now, mutual funds managed to float above the mire of Wall Street as a relatively clean industry that supposedly looks out for America's little guys: its middle-income investors.
Spitzer's allegation? That Canary somehow won approval from at least four major fund companies to engage in two practices clearly offlimits to individual investors. Canary allegedly was allowed to do late trading, purchasing funds at the market's closing price after 4 p.m., when the hedge fund could buy or sell shares in response to events that occurred after the market closed. Canary also supposedly got the green light to engage in market-timing - trading in and out of funds to profit from short-term pricing inefficiencies at the expense of long-term shareholders.
The Canary settlement with Spitzer names Bank of America, Bank One, Janus Capital and Strong Capital Management, all major managers of mutual funds. Other fund families are being investigated. Charges may yet be filed against the mutual fund players.
These ever-new stories of stacking the financial deck are getting old.
Look at behemoth Bank of America, which manages the Nations Funds group of mutual funds and happens to dominate Florida's banking market. Not only did Bank of America bless Canary's chicanery, the bank even loaned the hedge fund millions to help pay for its quick in-and-out trades.
Bank of America says its policies prohibit late-day trading, which is illegal. But wire reports say the bank's securities unit made an unusual offer in April 2000 of giving Canary access to trade from the time the market closed until as late as 6:30 p.m.
The bank also said Canary - run by Edward Stern, 38, the son of Manhattan real estate magnate Leonard N. Stern and an heir to the Hartz Mountain pet supply fortune - was the only customer that had a market timing deal. That practice may not be illegal, but it does not take a rocket scientist to realize this special service was not readily available to most of the bank's mutual fund customers.
On Thursday, Bloomberg News reported that Prudential Securities, which was bought by Wachovia Corp. earlier this year, is likely to be charged by Massachusetts state securities regulators for making improper mutual fund trades at its Boston office.
This sordid tale is still in the early chapters. But it is all the more glaring now that companies are starting to comply with new rules requiring them to disclose whether they have codes of ethics. The disclosure is part of the Sarbanes-Oxley law that, in the wake of Enron's shenanigans, mandates tougher governance of publicly traded corporations.
Consider, for example, St. Petersburg's Raymond James Financial. The regional securities firm disclosed this week in regulatory filings that it just adopted a "code of ethics for senior financial officers." That code is in addition to a standard code of ethics every RayJay employee must sign annually.
Spelled out among the senior financial officers' ethical duties? They must tell the audit committee, the key accounting watchdog panel of the board of directors, about any conflict of interest that could sully a transaction or business relationship.
Look for more of these specialized codes of ethics to crop up at other companies. Hey, it's about time the angels started shouting louder in that other ear.
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