Eliot Spitzer, Once Again

Hooray for the state AGs. New York State Attorney General Eliot Spitzer's latest investigation reveals illegal trading schemes between hedge and mutual funds that may be costing mutual-fund shareholders billions of dollars. Canary Capital Partners has settled with Spitzer, without admitting guilt, agreeing to return $30 million in illegal profits to shareholders in four mutual funds, pay a $10 million fine, and cooperate in an industry-wide investigation. The sums are small next to Spitzer's earlier triumph, a $1.4 billion settlement from Wall Street firms for slanting research to win investment banking business while misleading small investors. But they may be just the beginning.

Where is the Securities & Exchange Commission in this reform effort? True, no government agency has the formal mandate to regulate hedge funds, even though they play a powerful and growing role in the markets. But the SEC does have authority over mutual funds. Why did it leave it to a state AG to oversee the mutual-fund industry, just as it did with Wall Street research? To his credit, SEC Chairman William Donaldson has done a good job in reestablishing the regulatory agency's credibility after the lax tenure of Harvey Pitt during the wave of corporate scandals. He has also launched studies on mutual-fund disclosure and fees, and whether or not hedge funds need regulation. But Spitzer has been acting while the SEC has been studying.

The SEC should dig deep into mutual funds' activities and draw up a set of rules for hedge funds. And both the SEC and the Justice Dept. have to finally bring charges against those who led Enron and WorldCom. Oklahoma Attorney General Drew Edmondson is poking his finger in the eye of the feds by going after WorldCom's Bernie Ebbers. Once again, it is the state AGs who are the heroes to individual investors. If Washington doesn't want 50 Eliot Spitzers making policy, it had better make sure the SEC and Justice do their jobs.

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