Mutual Funds: A Scandal Grows

By Barbara Kiviat

New York State attorney general Eliot Spitzer has more up his sleeve in his ongoing campaign against improprieties in the mutual-fund industry. He trotted out his latest target last week: Richard Strong, chairman of Strong Financial Corp., one of the nation's largest fund firms. Strong is accused of violating securities laws by engaging in short-term trading in his firm's funds, a practice the company prohibits. (Strong said he would resign if appropriate and would personally reimburse any investors who lost money because of his trading.) In a separate move, Putnam Investments became the first firm to be charged in the industry-wide investigation when the Securities and Exchange Commission and Massachusetts regulators filed suit claiming the company had condoned rapid trading by at least six of its fund managers.

Are there abuses at other mutual funds yet to be uncovered? "We have seen some evidence of that," Spitzer told TIME. At congressional hearings this week, top brass from the industry's main trade group are planning to push a three-pronged proposal. They want to impose a 2% redemption fee on all funds except money markets; require that the firms, and not any intermediaries, receive orders by 4 p.m.; and restrict trading of fund shares by insiders. Spitzer, who is scheduled to appear at the hearings, wants an industry overhaul that starts at the top. "We have to shake up fund boards the same way we've shaken up corporate boards," he says. --By Barbara Kiviat