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 me. 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.
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Karen Dolan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.