Fallout from the Mutual Fund Trading Scandal

Abstract

ABSTRACT. In September 2003, several prominent mutual fund companies came under investigation for illegal trading practices. Allegations suggested these funds allowed certain investors to profit from short-term trading schemes at the expense of other investors. Surprisingly, regulatory authorities have known for more than two decades of the potential for such abuses, yet have taken limited steps to correct the problem. We explore investor reaction to the scandal by measuring assets under management, stock returns, and performance. Mutual funds managed by investigated firms show a substantial decline in post-announcement assets under management. These firms also experienced significantly negative announcement-period returns. Finally, we discuss several policy suggestions to prevent future trading abuses and provide direction for future research.

The influence of firm, industry and network on the corporate social performance of Japanese firms

“…For instance, Rees (1997) describes how the Union Carbide's Bhopal incident significantly damaged the reputation of the entire chemical industry and the Three Mile Island accident had the same effect on the US nuclear industry. Similarly, the Exxon Valdez Oil Spill harmed the reputation of the petroleum industry (Hoffman & Ocasio, 2001) and recent scandals regarding market timing and after hours trading involving a number (but not all) of mutual fund companies have had a deleterious effect on the public reputation of that industry (Houge & Wellman, 2005). In recognition that the actions of one firm can seriously affect the reputations of others in the same industry, many industry groups have embarked upon strict self-regulation programs in order to prevent reputation damaging activities (King & Lenox, 2000).…”

Does Payment For Order Flow To Your Broker Help Or Hurt You?

“…There are many brokers competing for a fixed number of investors who can move from one broker to another at a trivial cost. When there is limited competition or a high cost to moving accounts, (for high-quality investment bankers, see Chen and Ritter (2000) and Loughran (2005), for mutual funds, see Houge and Wellman (2005) and Ackermann and Loughran (2007)), there appears to be more unethical behavior other than payment for order flow.…”

A Few Bad Apples? Scandalous Behavior of Mutual Fund Managers

“…However, recent high-profile corporate scandals, such as Enron, WorldCom, Tyco and HealthSouth, have rekindled interest in this area of study and increased research efforts to identify factors preceding and following unethical and/or illegal behaviors (e.g., Ghoshal, 2005;Houge and Wellman, 2005).…”

“…For example, in recent years the mutual fund industry has come under the spotlight as several industry-leading companies, such as Putnam, Strong, and AllianceBernstein, have been at the forefront of accusations and investigations of illegal activity (Houge and Wellman, 2005;IFLR, 2004a, c;Maiden, 2003). Recent investigations into these mutual fund companies have resulted in multiple charges by the SEC and other State Attorneys General; in fact, in 2003 and 2004, 25 mutual fund organizations were charged or investigated for illegal trading activities.…”

“…While recent research has provided an examination of investor response to fraud in the mutual fund industry (e.g., Houge and Wellman, 2005), many questions related to these issues have been left unanswered. For instance, why have we seen a rise in illegal practices, particularly within mutual fund organizations?…”