Kickback scandal shakes up the mutual fund industry.
Sigh ... yet another fund scandal.
The latest is a growing scandal around kickbacks paid to fund companies by Bisys
Regulators say that the way the kickbacks worked is that Bisys would overcharge fund investors for its services and then kickback to the fund company money that rightly belonged to fund investors. Similar to other fund scandals such as market-timing, late trading, front running, and overcharging for transfer-agency fees, the amounts involved were small when viewed in terms of their effect on individual shareholders, but hefty when summed up. In this case Bisys paid $230 million in kickbacks from 1999 through June 2004, according to the SEC.
In addition, another service provider, SEI Investments
How'd they get away with it? Well, it appears that independent directors were kept in the dark on the matter. Perhaps inside directors knew about it but didn't share that information with independent directors. Or maybe Bisys kept the board in the dark. After all, one of Bisys' services is providing the chief compliance officer to a fund board. Talk about conflict of interest.
Regardless of who knew about the Bisys kickbacks, fund companies clearly violated their fiduciary duty to fundholders by pocketing money that belonged to them. Some of the market-timing was in a gray area, but this was not.
So far, the SEC has not named the fund companies involved, but The Wall Street Journal wrote that AmSouth Bancorporation
We have found language similar to AmSouth's disclosure in filings from Pacific Trust Funds advised by the Bank of Hawaii: "In addition, the Funds' administrator, BISYS Fund Services Ohio, Inc., is currently the subject of an SEC investigation related to its past payment of certain marketing and other expenses with respect to certain of its mutual fund clients, including the Funds. Based on management's review and consideration of the matter to date, management does not believe the Funds' financial statements would be adversely impacted as a result of this investigation."