White Collar Crime in the Mutual Fund Industry

White Collar Crime in the Mutual Fund Industry

White Collar Crime in the Mutual Fund Industry

White Collar Crime in the Mutual Fund Industry

Synopsis

Peterson examines conditions and structures that led to abuses in the mutual fund industry. He seeks to provide understanding of not only the scandal's causes and its effects on investors, but also the regulatory response and reformation process. He breaks the scandal down into three parts: its root causes, regulatory responses by various actors, and attempts at reform and regulation. Key themes (e.g., why attorney generals were more successful in prosecuting this scandal than the SEC) are then identified to aid in a holistic understanding of the market timing and late trading scandal. The findings should help advance our understanding of financial scandals and white-collar crime.

Excerpt

Mutual funds have enjoyed a reputation as a “safe investment” with low risks. Unlike the rest of the securities industry, they have been relatively free of any scandals or criminal investigations. The mutual fund industry has also seen tremendous growth over the past twentyfive years, as the introduction of retirement accounts turned mutual funds into a staple for investors with an eye toward the future. These factors created a $7 trillion dollar industry with approximately 91 million investors (Swensen, 2005, p. 209). This safe, investment staple was threatened in October 2002, when a hedge fund employee alerted former New York State Attorney General Eliot Spitzer that her fellow employees were late trading and market timing mutual funds; practices which harm long-term investors by skimming a fund’s profits. The resulting investigations discovered brokerage firms and mutual fund companies regularly colluding with hedge funds and other large investors to allow these groups to skim almost $5.5 billion per year. Subsequent prosecutions resulted in dozens of cases and over $4 billion in fines and disgorgement (see Appendix 3).

This monograph will provide insight into the series of events known as the late trading and market timing scandal. The goal is to provide an understanding of the cause of the scandal and its effects on investors, but also the regulatory response and reformation process. This is done by using facts and statements about the scandal, as well as criminological, sociological, and economic theories to make sense of the outcomes. In order to accomplish this, I will provide the background and context of the mutual fund industry. Next, I will break the scandal down into three parts: its root causes, regulatory responses by the various actors, and attempts at reform and regulation. This study will result in four primary chapters and a conclusion: the introduction and literature review, an aggregate examination of market timing and late trading cases, the New York Attorney General’s response to the . . .

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