BIRDSEED HEIR IS HEDGE-FUND WARBLER (Canary Capital runs afoul of Spitzer)

Edward, who called his father Leonard instead of "dad," joined the family's pet-food conglomerate Hartz Mountain in 1987, after his journalism stint, moving up the ladder to head the operation from 1997 until it was sold in 2000.

Wow, from journalism to corporate head........(/sarcasm). Jayson Blair could learn from this.

I'm not sure how significant Spitzer's claims are, but I can say that it seems there is a disposition against hedge funds among a lot of people simply because they don't understand what hedge funds do.

Certainly might be true, however the cases Spitzer is outing involve known activities where hedges allowed insiders to profit at the expense of outsiders.

The fact that Spitzer is investigating Canary Capital is not surprising. He undoubtedly remembers the numerous legal problems Hartz Mountain had in the nineteen eighties when it was indicted on obstruction of justice and other claims. How it managed to escape real penalties is a story unto itself.

http://cbs.marketwatch.com/news/story.asp?siteid=bigcharts&dist=news&guid=%7BCBBA2D9C%2D4872%2D437E%2DBE91%2D5C10761BB6E4%7D

FINANCIAL STOCKS

Fund firms fall amid probes

By Greg Morcroft, CBS.MarketWatch.com
Last Update: 11:49 AM ET Sept. 4, 2003

NEW YORK (CBS.MW) -- Shares of several mutual fund-related companies fell Thursday as investors fretted about the firms' liabilities related to allegedly illegal trading with hedge funds.

Janus Capital (JNS: news, chart, profile) saw its shares fall 96 cents, or 5.7 percent, to $15.92 after losing more than 6 percent in the previous session.

In related action, shares of Bank of America (BAC: news, chart, profile) pulled back after the Charlotte, N.C.-based institution said it's cooperating with New York state Attorney General Eliot Spitzer in a probe of trading practices involving mutual funds and hedge funds.

Bank of America acknowledged earlier Thursday that Canary Capital, a hedge fund that agreed Wednesday to pay $40 million to settle civil matters with Spitzer, is a client.

Bank of America said in a statement that Canary "is the only customer with which we had an agreement to permit market timing in our mutual funds."

The bank said it has a policy in place that prohibits late-day trading of mutual fund shares, adding: "We are in the process of determining all of the facts about this specific situation and any potential issues in the application of our policies."

Separately, Prudential Financial (PRU: news, chart, profile) slipped 3.2 percent on word it's the target of a Massachusetts probe of its mutual fund business. See more details

In broader sector action, U.S. financial stock indexes retreated modestly in early trading. The weakness was broad-based, and the few stocks rising posted only small gains.

The Amex Securities Broker/Dealer Index ($XBD: news, chart, profile) dropped 0.4 percent and the Philadelphia Bank Sector Index ($BKX: news, chart, profile) fell 0.4 percent.

http://cbs.marketwatch.com/news/story.asp?siteid=bigcharts&dist=news&guid=%7BC1E6B226%2DC4D7%2D4B46%2DBFA3%2DC2B602328D56%7D

FUNDWATCH

Scandal shakes fund shareholders

By Jonathan Burton, CBS.MarketWatch.com
Last Update: 1:55 AM ET Sept. 4, 2003

SAN FRANCISCO (CBS.MW) -- Shareholders who thought their mutual fund companies were above reproach had that trust broken Wednesday as several were accused of trading abuses.

The fraudulent practices enriched fund managers at shareholders' expense, according to New York Attorney General Eliot Spitzer.

Fund industry observers were taken aback by the magnitude of Spitzer's allegations.

"I find it absolutely stunning and almost inconceivable that anything like that could possibly go on with any fund firm that has even a hint of value to its reputation," said Jack Bogle, founder of fund giant Vanguard Group and an outspoken fund industry critic.

Four fund families including Bank of America's (BAC: news, chart, profile) Nations Funds, Banc One (ONE: news, chart, profile), Janus Capital Group (JNS: news, chart, profile) and privately held Strong Capital Management were implicated in Spitzer's complaint for helping a hedge fund make trades that bilked tens of millions of dollars from small investors.

No formal charges have been filed against the fund companies, and no fund company has admitted any wrongdoing, but Spitzer said an investigation is continuing.

And while the allegations are shocking, to be sure, individual investors shouldn't rush to dump their funds, industry watchers say.

"I don't think anybody needs to sell just because of this," said Roy Weitz of Fund Alarm, an online industry watchdog. "All of the shenanigans these fund companies have allegedly engaged in are reflected in the price of the funds."

A key question, Weitz added, is an ethical one. "Investors have to decide if that's the kind of fund company they want to do business with," he said.

The $40 million settlement that Spitzer's office reached with hedge fund Canary Capital Partners LLC cast an unfavorable light on two profit-making schemes that allegedly occurred with the cooperation of the fund families and an intermediary.

Both schemes breached the fund companies' fiduciary duty to shareholders in exchange for substantial fees and other income for themselves, Spitzer alleged in a detailed 44-page complaint.

One scheme involved Canary's "late trading" of mutual fund shares, allegedly through an agreement with certain financial institutions including Bank of America. As described in the complaint, orders received after the market's 4 p.m. Eastern close received that day's price, in violation of securities laws. A fund's price, or net asset value, is calculated once each day at the market close. Orders placed later are supposed to be filled at the following day's closing price.

But the late-trading deal Spitzer outlined enabled Canary to take advantage of market-moving events occurring after the close. Canary apparently could buy and sell hundreds of funds, in addition to the Nations Funds. And a pact with an intermediary, administrative services firm Security Trust Company, gave Canary late trading capacity as late as 9 p.m. Eastern. Spitzer likened the practice to "betting today on yesterday's horse races."

"The late-trader's gain is the long-term investor's loss," Spitzer noted in the complaint.

"This is a 'go to jail' accusation; this is not a slap on the wrist," said Louis Harvey, president of Dalbar, a financial-services market research firm in Boston that advises fund companies. "I've never seen any infraction of this scale in the fund industry."

In the second scheme, the four named fund companies are said to have permitted market timing of their funds -- trades based on expectations of very-short-term gains -- when their prospectuses specifically assured investors that such practices were discouraged.

The fund companies allegedly received substantial investments into some of their funds in return, enriching assets under management -- and themselves, Spitzer charged.

It's fund shareholders who take a hit when market timers redeem shares and take profits. Fund managers must either sell stock or use cash to meet the redemption, leaving remaining shareholders stuck with the bill for capital gains and trading costs.

"If there were direct violations of rules in terms of late trading, and if there were deals cut on timing that violated internal policies of funds that were designed to protect investors, then we wholeheartedly support the regulatory effort to identify and punish the offenders," said Paul Haaga, Jr., chairman of the Investment Company Institute, an industry trade group in Washington, D.C., and a senior executive with the American family of funds. "There's no way the industry condones that."

Many fund companies, to their credit, try to keep fund timers out by charging redemption fees for short-term holdings and in extreme cases, simply not taking a timer's money. But the complaint names several Janus funds, including its Worldwide (JAWWX: news, chart, profile), Mercury (JAMRX: news, chart, profile) and High-Yield (JAHYX: news, chart, profile) portfolios, as being made available to Canary's market-timing bid.

Similar deals were struck with certain Strong funds, the complaint adds, specifically its Growth 20 (SGRTX: news, chart, profile), Growth (SGROX: news, chart, profile), Large-Cap Growth (STRFX: news, chart, profile) and Dividend Income (SDVIX: news, chart, profile) portfolios.

In separate statements, all four companies said they were cooperating with the New York State Attorney General's office.

Geoff Bobroff, a fund industry consultant, said, "This is raising the inherent conflicts that exist in the industry, with the manager making sure that he benefits even though there might be some diminishment of value to their investors."

Liz, as noted above, this is not a slap on the wrist deal or a fickle investigation because we don't know about hedge funds.

If this was done, this is criminal action. This hedge fund made illegal after closing profits from the fund owners.

I have noticed that most of the better funds have their NAVs posted within an hour or less after the markets close.

Others seem to take forever. This has raised flags for me in the past and in today's market.

Liz, as noted above, this is not a slap on the wrist deal or a fickle investigation because we don't know about hedge funds. If this was done, this is criminal action. This hedge fund made illegal, after-closing profits from the fund owners.

The integrity of the financial system must be conditioned on the understanding that the system is a level playing field and that everyone has access to the same set of facts when making investment decisions. Oh, sure, some will say it's naive to think so, but after massive accounting and insider frauds like Enron, WorldCom, Global X, and insiders like Terry McAwful and Grubman pocketing huge profits, and all of the rest of turmoil we've seen on Wall Street, we know better. And now this. Makes a person downright cynical.