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Fund Spy

The Scandal That Walked in the Front Door

Kickback scandal shakes up the mutual fund industry.

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Sigh ... yet another fund scandal.

The latest is a growing scandal around kickbacks paid to fund companies by  Bisys (BSG), a third party that provides a wide range of mutual fund back-office services, such as accounting, shareholder report production, and transfer-agency services. Bisys settled charges with the SEC, but The Wall Street Journal reported that the SEC has now turned its attention to 27 mutual fund companies that may have accepted kickbacks. At this point, we don't know how many, if any, of those fund companies will actually face charges from the SEC.

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.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.