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Views Differ on Whether to Sell Off Mutual Funds Targeted by Spitzer

Despite Morningstar's advice to consider getting out, S&P tells investors to wait and see.

September 19, 2003|Tom Petruno | Times Staff Writer

Should investors sell out of mutual funds managed by companies named in New York Atty. Gen. Eliot Spitzer's probe of the industry this month?

Fund tracker Morningstar Inc. last week said investors should at least think about selling -- a recommendation that incensed Janus Capital Group Inc., one of the companies Spitzer is investigating.

On Thursday, Standard & Poor's, whose fund research business is a rival to Morningstar, took a different tack.

"We would not recommend that investors consider selling the funds run by these fund companies until the attorney general and the fund companies involved release a more detailed analysis of the investigation," said Phil Edwards, S&P's director of funds research.

On Sept. 3, Spitzer stunned the fund industry when he made public an investigation into illegal or improper trading in funds offered by four companies: Bank of America Corp., Bank One Corp., Janus and Strong Capital Management.

Spitzer said a hedge fund, Canary Capital Partners, was allowed by the fund companies to quietly engage in market-timing trades that hurt potential long-term returns for buy-and-hold investors.

This week, Spitzer charged a Bank of America broker, Theodore Sihpol, with abetting Canary's alleged illegal trades. No charges have been brought against the other three fund companies or any of their personnel, though Spitzer has made clear that his investigation is continuing.

Morningstar, in a commentary about Janus last week, painted the Denver-based firm's status as a target of Spitzer's probe as a "third strike" against the company. The other two strikes: "poor bear-market performance" and "noteworthy" departures of fund managers.

"We think that the Janus fund family does not deserve investors' confidence," Morningstar analyst Brian Portnoy wrote.

Janus Chief Executive Mark Whiston shot back this week with a letter to Morningstar, saying the recommendation to jettison Janus funds wasn't "fair, warranted or accurate." He called the recommendation a "dump now/get the facts later" approach.

For its part, Standard & Poor's said it was too early for its researchers to consider changing their recommendations on funds of the four companies.

Separately Thursday, Prudential Financial Inc. said that Spitzer and federal regulators had requested information in an expanded probe into the firm's mutual fund trading.

The company said it received formal information requests from Spitzer, the Securities and Exchange Commission and NASD, the brokerage industry's self-regulatory group. It said it was cooperating with all inquiries and conducting an internal review. Spokesman Bob DeFillippo declined to discuss the scope of the internal review.

Two weeks ago, Prudential said it was subpoenaed by Massachusetts regulators seeking information about market timing fund trades allegedly made by brokers in the firm's Boston office.

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Reuters was used in compiling this report.

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