Just when we all thought the investing world was straightening up and flying right, along comes another finance scandal. This time it involves the manipulation of pricing and timing trading patterns of mutual funds by a few mutual fund management companies.

In Bermuda, we have been detached about previous dicey investment malfeasances, somewhat assured that the end result would not directly impact us unless we owned Enron or WorldCom or other ill-fated stocks. However, this latest in what seems to be an endless line of insiders making investment profits by "hook or by crook", involves at least one mutual fund company's funds that Bermudian residents may own.

A Reuters article in last Saturday's Royal Gazette reported that some companies managing mutual funds, Bank of America - BAC:NYSE, Bank One - ONE:NYSE, Strong Financial and Janus Capital Management - JNS:NYSE have allegedly been engaging in illegal arbitrage strategies to benefit themselves and some of their privileged institutional investors.

There have been rumours about market timing and late trading in mutual funds for more than a year, no companies had been accused by name until last week.

In a new twist on an old wrinkle, Attorney General of New York Elliot Spitzer announced that his New York office has reached a $40 million dollar settlement with hedge fund Canary Capital Partners and its managing principal, Edward Stern, for a swindle involving mutual fund management in the fleecing its own (mutual fund) shareholders. The fine that Canary agreed to pay (as usual without denying or admitting guilt) will be used to reimburse harmed shareholders. How exactly, no one knows.

Attorney Spitzer, as you may recall, has already achieved global status by exposing conflicts of interest and collusion among investment bankers and research analysts, thereby forcing many of the largest Wall Street firms into huge settlements - $400 million for Smith Barney alone. Monitoring and self-regulation of the industry is supposed to be done by the United States Securities & Exchange Commission. Of late, they have been flexing their muscles, trying to muzzle Mr. Spitzer by proposing a bill that would limit the power of his state office. His response was to expose more nasty thefts of investment assets from the unsuspecting general public. And his implicit message to the SEC was: "There will be more investigations into unethical investment & mutual fund company practices and if you (SEC) were doing your job, I wouldn't have to."

Remember the statement that you can't time the market? You can (and reap big profits, too) when you have a little help from your friends, mutual fund manager friends that is. Market timing and pricing anomalies opportunities can be accomplished in a number of ways: by taking advantage of after-market price swings on different trading exchanges (the reason why international investors may be affected); by shorting stock plays within the mutual fund - this requires privileged current knowledge of every mutual fund holding; or by after hours rapid trading in and out of a mutual funds.

Why would mutual fund managers do this? The name of the game is bringing in new money to invest - and most importantly year-end bonuses for brokers and fund managers demonstrating year on year growth in mutual funds. Attorney Spitzer stated that Canary Capital Partners engaged in illegal activity with the four companies named above to boost the hedge fund returns. In exchange for Canary being allowed to deal in proprietary information, it is alleged that Janus got millions of new Canary money placed into their money market fund. Small investors are prohibited from selling in and out for a quick gain; seems, they get to keep those losses as take the gains get taken from them. Big people, big influence, big profits.

The big difference between the group listed above and other mutual fund companies such as Putnam, Fidelity, Vanguard, Eaton Vance, is that the latter have had very strict procedures in place for years to combatthis type of illegal activity. These firms take the trust and the faith of their shareholders very, very seriously. Jack Brennan of Vanguard stated that he was very concerned about the tarnishing of the industry's reputation when they believed that doing what was right was the best way to win investors trust.

How can you tell if your mutual funds have compliance procedures in place to stop the theft of your profits?

The prospectus should spell it all out, specifically stating that they use fair value pricing at the end of each day (this eliminates price discrepancies between markets); prohibits any large volume active trading and has specific trading windows; imposes high redemption fees for those trying to cash in; and refuses to release current asset holdings to any select group, you can be pretty sure that your mutual funds are managed by ethical professionals.

The Wall Street Journal reported on Monday that Bank of America had fired those involved. Janus' CEO apologised, assuring shareholders that "Janus was committed to the highest ethical standards and to acting in your best interests". Janus is involved in another potential firestorm regarding the Clayton Home Inc (construction firm) merger with Berkshire Hathaway. It appears that Clayton Home company management may have misrepresented the stock position that Janus held in Clayton in order to sweeten the deal with Berkshire. Aggrieved Clayton Home shareholders filed a breach of fiduciary duty to block the merger.

On Monday, www.thestreet.com reported that Morningstar (a mutual fund rating service) advised investors they will not recommend positions in any of the four named mutual fund companies, including Janus.

Janus, a god from Roman Mythology, is depicted with two faces looking in opposite directions. Do you remember what being two-faced means?

Martha Harris Myron CPA CFPr is a Bermudian, and a V.P. at Bank of Bermuda. She specialises in Wealth Management & Planning using Lifestyle Strategies for Lifetime Success. She formerly owned a United States financial services practice meeting the needs of 400 individual and corporate clients. Confidential Email can be directed to marthamyron@northrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans.