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Get Four
|  | SEPTEMBER 27, 2004
By Amey Stone Answers for Scammed Fund Investors If your fund was snared in the market-timing scandal, here's why it may be quite some time before the check is in the mail New York Attorney General Eliot Spitzer announced his sweeping investigation of late-trading and market-timing abuses in the mutual-fund industry 13 months ago. That makes it about a year since fund companies under investigation started coming clean, ousting the executives involved and -- most important -- promising to compensate shareholders for losses incurred. Much has happened as a result. Regulators have adopted stricter laws designed to prevent such abuses and wrangled settlements out of nearly a dozen fund companies, including prominent outfits like Putnam, Strong, Janus (JNS ), and MFS. The settlements total about $2.8 billion in cash, roughly half of which is earmarked to pay back shareholders. At the same time, class actions are under way. Plaintiffs' attorneys face a major deadline to file amended complaints on Sept. 29. They're hoping to get even more money back in damages for fund shareholders. But not a single dollar has been paid back to shareholders -- yet. What's going on? Fund investors are likely to be asking plenty of questions as they watch the ongoing scandal and wonder if they'll ever receive compensation. Here are some, along with the answers: Q: When will individual investors get compensated? A: The best estimates are that it will take six months to a year before investors hurt by late-trading and market-timing abuses receive payment. Restitution could come in the form of a check from the fund company or as funds restored investors' accounts -- that part hasn't been decided yet. Funds that settled with regulators were generally supposed to file a plan with the Securities & Exchange Commission within six months, but that process may already be slipping. Still, say experts, wrapping up the settlement process by fall of 2005 should be achievable. "I'd be surprised if it went beyond the end of 2005," says Mercer Bullard, president of shareholder advocacy group Fund Democracy. He figures the SEC hopes to have the restitution process completed before next September, a timeframe that would see the whole mess exposed, rectified, and recompensed within two years. Q: Why is it taking so long? A: In the settlements, the SEC outlined a roughly six-month process in which fund companies have to hire an independent distribution consultant (IDC) that will devise a method for calculating payments due to investors and develop a plan for issuing payments. Then the SEC must approve the plan. The payments will come from the settlement monies that companies are now placing in escrow. Unlike the SEC's settlement with investment banks over conflicts of interest, which were consolidated, each fund case is being handled separately and on its own timeline, says SEC spokesman John Heine, who adds: "There are lots of moving parts." So far none of the companies that agreed to a settlement have announced the hiring of a distribution consultant. It's proving harder than expected to find qualified people to do this work, says Alan Friedman, a damages-evaluation expert with valuation firm InteCap in New York, who's representing several fund companies. "That may be an indicator that this process will take longer," he says. "I believe this will not be quick." Q: What's the problem? A: You might think that hiring an IDC would be the easy part. The hard part? Figuring out which funds were affected by late trading and market timing, computing the harm to each fund, and then determining how much damage was done to each shareholder. Trouble is, the level of detail needed to perform these calculations is immense. It requires taking into account not only how much money each shareholders had in the fund but considering every time they bought or sold shares. Depending on individual trading patterns, some shareholders may have lost hundreds of dollars due to the timing activity, while others may actually have made some money thanks to the market-timers.
BW MALL
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