Answers for Scammed Fund Investors

If your fund was snared in the market-timing scandal, here's why it may be quite some time before the check is in the mail

By Amey Stone

New York Attorney General Eliot Spitzer announced his sweeping investigation of late-trading and market-timing abuses in the mutual-fund industry 13 months ago. That makes it about a year since fund companies under investigation started coming clean, ousting the executives involved and -- most important -- promising to compensate shareholders for losses incurred.

Much has happened as a result. Regulators have adopted stricter laws designed to prevent such abuses and wrangled settlements out of nearly a dozen fund companies, including prominent outfits like Putnam, Strong, Janus (JNS ), and MFS. The settlements total about $2.8 billion in cash, roughly half of which is earmarked to pay back shareholders. At the same time, class actions are under way. Plaintiffs' attorneys face a major deadline to file amended complaints on Sept. 29. They're hoping to get even more money back in damages for fund shareholders.

But not a single dollar has been paid back to shareholders -- yet. What's going on? Fund investors are likely to be asking plenty of questions as they watch the ongoing scandal and wonder if they'll ever receive compensation. Here are some, along with the answers:

Q: When will individual investors get compensated?


The best estimates are that it will take six months to a year before investors hurt by late-trading and market-timing abuses receive payment. Restitution could come in the form of a check from the fund company or as funds restored investors' accounts -- that part hasn't been decided yet.

Funds that settled with regulators were generally supposed to file a plan with the Securities & Exchange Commission within six months, but that process may already be slipping.

Still, say experts, wrapping up the settlement process by fall of 2005 should be achievable. "I'd be surprised if it went beyond the end of 2005," says Mercer Bullard, president of shareholder advocacy group Fund Democracy. He figures the SEC hopes to have the restitution process completed before next September, a timeframe that would see the whole mess exposed, rectified, and recompensed within two years.

Q: Why is it taking so long?


In the settlements, the SEC outlined a roughly six-month process in which fund companies have to hire an independent distribution consultant (IDC) that will devise a method for calculating payments due to investors and develop a plan for issuing payments. Then the SEC must approve the plan. The payments will come from the settlement monies that companies are now placing in escrow.

Unlike the SEC's settlement with investment banks over conflicts of interest, which were consolidated, each fund case is being handled separately and on its own timeline, says SEC spokesman John Heine, who adds: "There are lots of moving parts."

So far none of the companies that agreed to a settlement have announced the hiring of a distribution consultant. It's proving harder than expected to find qualified people to do this work, says Alan Friedman, a damages-evaluation expert with valuation firm InteCap in New York, who's representing several fund companies. "That may be an indicator that this process will take longer," he says. "I believe this will not be quick."

Q: What's the problem?


You might think that hiring an IDC would be the easy part. The hard part? Figuring out which funds were affected by late trading and market timing, computing the harm to each fund, and then determining how much damage was done to each shareholder.

Trouble is, the level of detail needed to perform these calculations is immense. It requires taking into account not only how much money each shareholders had in the fund but considering every time they bought or sold shares. Depending on individual trading patterns, some shareholders may have lost hundreds of dollars due to the timing activity, while others may actually have made some money thanks to the market-timers. By Amey Stone

Q: How much money are individual investors likely to get back?


It's going to vary widely. If your fund wasn't targeted by market-timers, you'll get nothing. For those in one of the dozens of funds aggressively targeted, the harm suffered to portfolios could vary from a few pennies to, in the worst cases, as much as 10% of a shareholder's investment.

A few individuals will likley have lost thousands of dollars due to market-timing and late trading, says Bullard. "That is the person for whom you really want to get this right."

For the overwhelming majority of shareholders, however, restitution will be small potatoes. Regulators wrangled about $1.4 billion in assets earmarked to be returned to shareholders out of approximately $2 trillion in affected fund assets affected. If you figure everyone has a $10,000 investment, that works out to under $10 per person. "This is not going to be an enormous windfall for anyone," Friedman says.


What about the lawsuits?


All the market-timing cases have been consolidated in a single court in Maryland. Plaintiffs' lawyers say they can prove that shareholders are due much more money than regulators settled for. This process could take up to five years to complete.

Even though fund companies have basically admitted improper behavior, proving they broke the law and that their customers deserve more money than the settlements have already recovered for them won't be easy, says Friedman.

But plaintiff's attorneys say all the facts aren't out yet. "We certainly don't believe the amount they agreed to will cover everything," says Glen Abramson, a lawyer with Berger & Montague, who was feverishly working to meet a Sept. 29 deadline to file an amended complaint detailing further charges against fund companies. "When the complaints go in, you'll see there are more to these cases than the mutual funds have said at this point," he says.

Q: So should investors be doing anything now?


No, and that's the good news. Fund companies have records of all shareholders, so they're automatically represented in the settlements and the class actions. If you sold your funds in a company that's facing charges and moved, you should make a call to make sure the company has your current address. Otherwise it shouldn't be necessary to contact the fund.

As for the class action, when a settlement or a verdict is reached, every investor will receive a notice of the amount due. They'll then have the opportunity to opt out of the class if they feel that suing as an individual would produce a better result. It's unlikely anyone would pursue that option, given the amounts most individual shareholders are likely to be due. For most fund investors affected by the scandal, compensation for damages is likely a small extra bonus that will show up long after they've stopped wondering what's due. While it won't be big, it's still worth waiting for.

Stone is a senior writer for BusinessWeek Online in New York

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