Transparent and fairly regulated financial markets are better for the investing public, and thus better for brokerage firms. Scandals involving mutual fund companies, corporate management, and celebrity stock transactions all affect investor confidence.
Investors who feel that the game is fixed are less likely to invest. To boost confidence, scandals should be dealt with fairly but as thoroughly as possible. Even a single publicly viewed exception can have lasting impact on U.S. financial markets.
Veteran investors and brokers alike understand that the markets are littered with inefficiencies and areas of less then decent behavior. The Securities and Exchange Commission has earned a reputation of being Draconian in its prosecution of law breakers. Martha Stewart and her broker Peter Bacanovic can attest to the harsh reality of keeping the image of the markets clean. They both stood trial for conspiracy, perjury, securities fraud and obstruction of the investigation into the sale of Stewartâ€™s stock in ImClone, a biotech firm. The truth is, the SEC could have let the whole thing slide and no one would have known or complained.
By winning the case, prosecutors made the point that no one is immune. Marthaâ€™s most damaging move was trying to deceive the SEC investigators. Her timely stock sale was not the basis of her conviction. Important lesson: Never talk to any state or federal agents about a case without a lawyer. The impact of the case will cause people in insider positions to take extra precautions in order to ensure that they are acting within the law.
When so much money is floating around in the markets, there will always be people who take advantage either knowingly or innocently. Many get away with it, but it is helpful to show the public that enforcement agencies will react. The scandals are not as damaging as doing nothing about them can be in long term investor confidence.
Market-timing of mutual funds is a legal trading strategy that is prohibited under most mutual fund prospectuses because it can dilute the value of a portfolioâ€™s holdings. Most funds control short-term trades by imposing fees that hamper potential profits from such trades. Market-timing and late trading (an illegal practice in which mutual fund shares are bought after 4 p.m. at prices that donâ€™t reflect after-hours news) are two main trading abuses that regulators have focused on in their investigation of the mutual fund industry.
Strong Capital was one of the first mutual fund companies to be implicated last September by Eliot Spitzer, New Yorkâ€™s Attorney General, in the mutual fund trading investigation. Spitzerâ€™s office charged that the mutual fund company struck a deal to permit Canary Capital Partners hedge fund to improperly market-time some of its mutual funds.
Richard Strong, the founder of Strong Capital Management, is paying a $60-million fine and will be barred from working in the securities industry. In addition, Strong Capital Management will pay an $80-million fine.
Now Eliot Spitzer is suing Richard Grasso, the former head of the New York Stock Exchange. Mr. Spitzer filed civil charges against Mr. Grasso, demanding the return of at least $100 million. Mr. Grasso has more to gain from fighting this suit than settling it, and is going for the fight. Although Mr. Spitzer may have ulterior political motives for filing a suit that has obvious grandstand appeal, the results will be felt with a net positive for investors and the markets.
Will Eliot Spitzer become governor of New York as a result of cleaning up Wall Street and beyond? As U.S. Attorney for New Yorkâ€™s Southern District from 1983-1989, Rudolph Giuliani was known for his successful high-profile prosecutions of Mafia bigwigs and Wall Street miscreants. The prosecutorial cleansing in the Giuliani era went through the crash of 1987 and prefaced the early Â´90s downturn. However, there are very often delayed reactions to the enforcement of laws. White-collar crimes are being dealt ever increasing penalties that are sometimes making even prosecutors a little queasy. Jamie Olis, the former Senior Director of Tax Planning for Dynergy was recently sentenced to approximately 25 years in prison for fraud connected with inflated and tricky financial dealings that would be eclipsed by similar dealings of grandeur by the creative executives working for Enron.
Obviously, there is more involved in having a healthy market. The economy, and general stability, are more important to institutions and individuals than the question of whether or not Martha makes an extra $50,000 or Richard Grasso makes an extra $100,000,000 (though that is a lot zeros). Eliot Spitzer has not made a case to sue Osama Bin Laden, President George Bush, Bill Clinton or Alan Greenspan.