Payback Time

Mutual funds are paying the price, but will you get your fair share?
Magazine Contributor
2 min read

This story appears in the August 2004 issue of Entrepreneur. Subscribe »

Settlement dollars from the SEC crackdown on mutual fund malfeasance will reach millions. So where will that money go?

Probably not into the checking accounts of individual investors whose investments shrunk due to improper market timing and after-hours trading. Instead, the money will be doled out to the funds themselves. The goal is to partly restore assets withdrawn by shareholders and to reduce investors' fees and expenses as compensation for bearing the cost of unfair trading practices without seeing any profits.

The SEC's investigation, however, may produce stricter oversight and regulations. "Disclosures have to be clearer," says Sherrie Savett, an attorney with Berger & Montague in Philadelphia who specializes in investors' rights. "Or there should be real penalties for going in and out of the market and a 2 percent redemption fee if trades are made in less than five days."

Such measures will go a long way to restore confidence in the mutual fund industry and turn back the ill effects of outflowing funds. Such losses, says Jeffrey W. Herrmann, a trial lawyer at McGuireWoods in New York City, "make mutual funds less efficient and may hurt the fund's stability."

Some observers don't rule out direct compensation for shareholders, particularly institutional investors like CalPERS, the retirement and health benefit fund for California public employees. But small investors can edge forward in line. Cheryl Moore, an attorney with Patton Boggs in Dallas, suggests a call to an SEC enforcement attorney to see if there's a checklist of potential beneficiaries related to a specific action.

Investors can also join one of the many class action suits sprouting across the nation. To see if your mutual fund is a target, visit Stanford University's Securities Class Action Clearinghouse at, which lists companies named in federal class action lawsuits. And prepare for a long wait.

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