June 09, 2004
Compliance Persons Of The Year
I'm not one for awards, as I usually see them as a career destroyer. But these ones are fun - their careers are already destroyed in the name of truth, justice, etc.
I refer of course to the mutual funds scandal. It has been a bit of an eye-opener for me, partly because of the dirt that was exposed, and partly because there are so many forces were against fixing the mess. It's known, for example, that regulators knew the game, but "could not do anything about it."
In a surprise move, Compliance Reporter, an industry governance magazine, has decided to give the so-called whistleblowers - Harrington, Nesfield and Goodwin - their award of "Compliance Persons of the The Year." While the press were busy digging up dirt on these guys to make them appear like evil participants (in some cases, to directly move attention away from the real evil participants, and in others, because it just made for a better story and they didn't understand the scam anyway) here is a group that recognises the rot in the system, and says:
"Though not compliance officers, Harrington, Nesfield and Goodwin's actions had more impact on the mutual fund industry than anyone's ..."
Elliot Spitzer also picked up the award for "Regulator of the Year." Equally controversial, and equally poignant. You have to hand it to these Compliance Reporter guys - they know how to point out that the rest of the industry ain't worth diddly squat when it comes to governance.
Fuller blurbs follow, FTR:
Compliance Persons Of The Year May 21, 2004 Noreen Harrington, James Nesfield, Andrew Goodwin, informants, The Canary Capital Partners case |  |
Harrington, Nesfield, and Goodwin sounded the alarm on mutual fund trading abuses by bringing the massive improprieties at Canary Capital Partners to light. By doing so they opened the door for New York Attorney GeneralEliot Spitzer, and eventually the Securities and Exchange Commission, to cast their nets on the mutual fund industry. Harrington is a "gutsy gal," said a Washington, D.C.-based securities lawyer. Though not compliance officers, Harrington, Nesfield and Goodwin's actions had more impact on the mutual fund industry than anyone's, the lawyer said. The informants are credited with being the catalysts for a complete ethical makeover of the entire industry. As Vanguard Group founder and former CEO John Bogle put it in a recent speech, "The shareholder is the raison d'etre for this industry's existence."
Harrington, whose job at Stern Asset Management was to distribute the Stern family's money to other investment funds, was the first to tell Spitzer's office about Canary Capital's trading irregularities. In June, she informed the Attorney General that Canary was parking investments in mutual funds in exchange for being allowed to rapidly trade other funds--also known as market timing. She also told the Attorney General's office that Canary had engaged in illegal late trading--the practice of executing trades at same day-prices after the 4 p.m. close.
Goodwin was a senior trader at Canary Capital, and Nesfield was a back-office consultant hired by Canary to recruit mutual fund companies that would let the hedge fund market-time their funds. Neither was on Canary's payroll when Harrington contacted Spitzer. Nesfield and Goodwin became informants in detailing Canary's abuses once Spitzer launched the investigation, and Spitzer's office acknowledged Harrington's and the informants' roles in the probe.
Harrington, Nesfield, and Goodwin's actions have opened the door to reforms that will keep continuing, said Donald Weiss, partner at Bell, Boyd & Lloyd in Chicago. As another lawyer added, there is just nothing like "a good squeal." Harrington and Goodwin's whereabouts are unknown. Nesfield lives in North Carolina and makes a living installing piers and working on fishing boats.
| Regulator Of The Year May 21, 2004 Eliot Spitzer, New York Attorney General |  |
In early September, Spitzer grabbed the mutual fund industry by the horns and ushered in an age of regulation the likes of which the industry had not seen in more than half a century. "The mutual fund industry is presently undergoing its most thorough transformation since the enactment of the 1940 Act," said Mitch Herr, partner at Holland & Knight in Miami and a litigator who represents securities firms. "No one could reasonably disagree that this entire process arises out of Spitzer's seminal investigation into Canary Capital [Partners] and the various market participants who allowed it to engage in late trading and market timing," said Herr. "Spitzer has been instrumental in identifying systemic problems in the securities industry that need to be addressed by the entire regulatory community."
In early September, Spitzer's office brought a case against hedge fund Canary Capital for market timing and late trading in several mutual funds. It was a case that will live in financial history as the opening battle in the war on fraudulent mutual fund trading practices. "There is no doubt that Eliot Spitzer was the primary catalyst in what resulted in the biggest mutual fund scandal and reform effort in history," said David Tittsworth, executive director of the Investment Counsel Association of America. After the Canary case, the Securities and Exchange Commission, the NASD and the Attorney General of Massachusetts brought charges against mutual funds and individuals who engaged in the trading practices.
"Spitzer certainly deserves recognition for his vigorous intervention into the securities enforcement arena," said C. Evan Stewart, partner with Brown Raysman Millstien Felder & Steiner in New York. "Whether all of his efforts are consistent with the primacy of the federal securities laws and whether all of his prosecutions have been interposed consistent with public policy, however, remain to be seen." Spitzer has received his share of criticism for attempting to regulate mutual fund fees and for not acting in concert with federal regulators such as the SEC. In spite of the controversy, many feel Spitzer has succeeded in his crusade to improve the markets and investor confidence. "[Whether you] agree with him or not, the fact is the public investor sleeps better at night as a result of Spitzer's recent actions," said Bill Singer, partner with Gusrae Kaplan & Bruno in New York.
Posted by iang at June 9, 2004 10:02 AM | TrackBack