Market Timing

Part of the problem is simply our society. There is a problem in the mutual fund industry, and it goes well beyond market timing. Some of the market timing allegations have merit, because it appears from the information that is coming to light that fund managers told investors that they would prohibit timing, and then let it go on anyway. That could be a fraud, and if it went on to any significant degree, people should be punished. Our financials services industry, and the people its serves – individual investors – are too important to allow the mutual fund companies to lie to us.

But the rest of the industry did not commit a fraud. If the press reports are to be believed, and if the SEC is to be believed, one fund family, Putnam, allowed insiders to trade their funds, with inside information. That is illegal, and has been illegal since at least 1934. That is one fund family, and a small group of its employees, engaging in an illegal insider trading scheme. Hardly a mutual fund scandal.

The second fund family to be involved is Invesco. According to the SEC, they have specifically told the public that they will not allow short term trading in their mutual funds. Period, it is not allowed. However, according to the SEC, not only did the fund fail to bother monitoring investors to see if they were short term trading, they engaged in unwritten agreements with large investors, to specificly permit the practice that they said they were prohibiting. That is a fraud.

Elliot Spitzer has subpoenaed virtually every mutual fund for information, to discover how “wide spread” market timing is. How wide spread is it? It’s an industry practice, it is perfectly legal, and Mr. Spitzer’s office and the offices of every other securities regulator have known about it for years – or at least they should have known about it.

So why all the sudden uproar?

But did they lie? and if they did, how long has this been going on? And, the real question that is lost in all of this – where have the regulators been all this time? If the regulators are to be believed, the fraudulent practices have been going on for years – YEARS, four, five or six years. According to the regulators, some mutual funds have been ripping off the public for years, in a flagrent fraud.

But who is supposed to be policing this? If the fraud was so flagrent, why did it go on for years? And why now, with the public whipped into a frenzy, are the regulators now going after the innocent mutual funds? Or are the politicans simply playing games with the press? I submit that the industry has not lied to us, and that while there are a few bad apples in this bushel, like any other bushel, we are witnessing, once again, hysteria, engineered by the politicians and the press.

And once again, the politicans and the regulators are running around, to once again cover up the failings of our politicans, our elected officials, and the government regulators.

First the media. I know a large number of reporters, and know that they are as hardworking as anyone. I know that sometimes it is difficult to report on a story that involves matters taht you are not familiar with, and that is why I spend time with reporters who are working on stories, for background informatin, without attribution, in the hope that the ultimate story has a foundation in reality. But a large segment of the media simply loves bad headlines, the worse the better. Failing to understadnt eh background of a story is bad neough. Engaging in misleading headlines is simply outrageous. And the mediat media loves to engage in piling on. Lets keep pounding a story until it is dead, lets make everything a scandal, and lets make sure our headlines are good and juicy.

Next is the politicans. Lets call it where it is. No doubt the corporate governance scandal was a scandal, and there are preople who are going to go to jail. but why did it go on for so long? We have the tightest series of regulations of any industry, and the regulators didn’t catch the scandal?

And now the mutual fund scandal. Sorry Mr. Spitzer and Mr. Gavin, but the practices you are now screaming about have been going on for years, under your very nose. You have nearly unbridled power to review any mutual fund company you want. You can walk into their offices unnanoucned, and aske to see any recrod you want. The mutual fund timeing that youar e trumptetin g to day is a standard business practice – a legal business practice – in the entire industry. The firm that have been conducting such practices as part of a fraud have een doing it for YEAR and YOU did not detect it.

I epxect that the police officer walking a beat will discover the robbery in progress, or at least catch most of them. If he doesn’t, he gets fired, or transfere, and his captain puts someone on that beat who can do the job. ; part is the simple self interest of securities regulators, and part of the problem is that the problem is not all that simple.


This is a recurrenat problem in the securities industry. I have written about this before in the context of the brokerage industry specifically, but it is a systemic problem with our regulatory system. The industry has one of the most compreshensive sets of rules of any industry in teh world. Each scandal that somes into the news presents calls for new rules, and new regualtions, but the conduct underlying the scandal is already illegal! The problem is not in the rules, but in the enforcement of those rules. The problem is enforcement.

The problem is our politicians, and our regulators. And what is the response to the “problem”? The politicans and the regulators,who, at a minimum are to blame for permitting the illegal practices to go on for so long, refuse to acknowledge their own failings. Then they compound the problem by ignoring the regulatory problem, and make it worse by creating new rules. Look at Sarbanes Oxley. Everything that was allegedly done at Tyco, or Worldcom, or by Arthur Anderson, was illegal. People are going to jail because it was illegal. The political response? Make more laws.

The problem was that our regulators never caught the conduct. We spend millions if not billions of dollars on a regulatory sysstem, we have hundreds of rules and regulations, hundreds of atotrneys, and investigators working for 54 different regulatory agencies, all regulating and investigating the same people, and they can’t see an accounting fraud?

And lets not blame Harvey Pitt. The Enron and Tyco frauds happened while Arthur Levitt was at the helm. they were uncovered while Mr. Pitt was in charge. The problem was Arthur Levitt’s SEC, not Harvey Pitt’s SEC.

So the politicians yell and scream, and act up for the cameras, they make pithy quotes for the press, and enact new laws to prevent hte condut that was aleready illegal and simply went undetected because the politicans failed to perform their job.

The politicans and reguators fail to enfoce the law, so they create new laws. Are we all animals on a farm? Or was that a looking glass that we just walked through?

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.