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Scandal-Harmed Fundholders: Is Your Check in the Mail?

A payday may be just around the corner.

Karen Dolan, 06/20/2007

Rip. That's the sound of more than $1.8 billion worth of checks being cut for fund shareholders hurt by the mutual fund scandals of 2003 and 2004.

Nearly four years later, investors now are being compensated for damage done by unethical trading. Determining how to compensate harmed shareholders proved to be a Herculean task.

In case you weren't following the fund scandals, it boiled down to fund company executives striking deals that allowed some investors (such as hedge funds) to make otherwise-prohibited short-term trades that paid off for the select customers and led to higher profits for the fund company--all at the expense of regular fund shareholders like you and your clients. The scandal encompassed a wide range of dishonest practices including market-timing, late trading, and front-running.

Many of the fund companies embroiled in the scandal have reformed by firing wrongdoers, beefing up compliance, and reconfiguring their sales practices. More importantly, some have begun to shift their corporate cultures so they're focused on fiduciary duties rather than simply complying with the letter of the law. Meanwhile, others have done the bare minimum required by regulators. We've been keeping close tabs on how stewardship-related issues have been shaking out in our Morningstar Stewardship Grades for mutual funds.

Status of the Payouts
While some fund companies were quick to embrace reforms, restoration payouts owed to investors have been slow in coming. That's not because fund companies have been dragging their feet. In fact, most fund companies agreed to the aggregate payouts when they settled charges with the SEC back in 2004. Since then, the responsibility for devising a plan to distribute the money has been in the hands of independent distribution consultants (IDCs). First, each IDC is charged with devising a plan to distribute the money fairly. Then, the IDCs post the plan to the SEC's Web site for public comment. After the SEC has approved the plan, payouts can begin.

The reason it took so long to come up with the distribution plans is because investors buy and sell funds every day, so the consultants had to determine damages for each day and match them to records of who owned the fund on that day. To complicate matters, many third-party records, particularly those of 401(k)s, were often short on detail. To top it all off, the SEC and the IRS had to decide how to tax the restoration payments, so there was a bureaucratic hold up, too.

In the table below, we provide a rundown that shows where different fund companies stand in the process.

 The Status of Mutual Fund Settlements
Fund Complex
Proposed Plan of Distribution Released?
Total Payout
AIM/INVESCO
(Click here for more information)
No, expected on or after June 29, 2007.
$375 million
Banc of America/Nations Funds
(Click here for more information)
No, expected on or after August 2007.
$375 million
Banc One (subseq. acquired by Chase)
(Click here for more information)
Plan approved by SEC in May 2007.
$50 million
Columbia
(Click here for more information)
Plan approved by SEC in May 2007.
$50 million
Federated
(Click here for more information)
No, expected on or after Aug. 31, 2007.
$72 million
Franklin
(Click here for more information)
Yes; now accepting comments
$50 million
Janus
(Click here for more information)
Yes; now accepting comments
$100 million
MFS
(Click here for more information)
Yes; in SEC review.
$175 million
Pilgrim & Baxter (PBHG Funds)
(Click here for more information)
Plan approved by SEC in November 2006.
$250 million
Putnam
(Click here for more information)
Yes; in SEC review.
$98 million
RS
(Click here for more information)
Yes; now accepting comment letters
$25 million
Strong (subseq. acquired by Wells Fargo Funds)
(Click here for more information)
No; expected on or after June 1, 2007.
$140 million
Waddell & Reed
No; expected date not available.
$77 million
Data was compiled from fund companies  and the SEC.

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