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8 Fund Families the Mutual Fund Trading Scandal Changed Forever

The controversy affected some firms more than others.


None of the firms implicated in the 2003 mutual fund trading scandal are the same as they were 20 years ago. Some disappeared, others evolved, and all responded in diverse ways to trends like the rise of passive investing and exchange-traded funds. The episode, however, influenced every fund family. Here’s a look at how it changed the trajectory of a sampling of fund companies at the epicenter of the storm.

Strong’s Weaknesses

In many ways, the fund scandal ended the founder-dominated big fund company. Industry growth and more-demanding investors had already set the trend in motion. But the scandal showed the true downside of having an all-powerful founder. Strong Funds was very much a reflection of founder and CEO Dick Strong’s qualities and quirks. He built an array of specialized small equity and fixed-income teams. Some were decent, but Strong was an aggressive trendchaser and micromanager. He launched lots of flavor-of-the-month strategies and regulated the firm’s Menomonee Falls, Wisc., office down to designating staircases as up- or down-only to keep people from trying to go opposite directions at the same time.

So, when Strong’s compliance officer told him his rapid trading of his own funds was against the rules, Strong told him to take a hike. The $1.4 million he made from hundreds of trades, however, would cost him about $1 billion as regulators forced Strong to sell his firm to Wells Fargo WFC for half the price he had been offered a year earlier. The firm also allowed hedge funds to do market-timing, but Strong’s reckless behavior was the firm’s demise. Besides making him sell out, the SEC fined his firm $140 million and barred him from the industry for life.

Pilgrim’s Regress

PBHG Funds’ misdeeds were among the more-shocking revelations. Co-founder Gary Pilgrim invested in a friend’s hedge fund that market-timed mutual funds and he allowed it to trade PBHG funds with the knowledge of co-founder Harold Baxter. That means they harmed their own fundholders to make money for the hedge fund and off it while it invested in PBHG funds and paid their fees.

In addition, Baxter tipped off a broker with nonpublic information on the fund’s holdings before they were disclosed to the investing public. Because of the momentum-driven nature of the portfolio, that was valuable trading information. The broker rapidly traded PBHG funds and hedged trades by setting up short positions in the funds’ holdings, according to the SEC settlement, which hit the firm with $250 million in fines and banned Pilgrim and Baxter from the industry. PBHG’s brand never recovered; its parent, Old Mutual, tried renaming it Liberty Ridge Capital, but by 2009 it was gone.

Something Was Rotten in Boston

Although Putnam’s fines weren’t the largest, it had one of the hardest falls from grace of any firm that wasn’t sold or shuttered outright. The 2000-02 dot-com bust wounded the firm, but Putnam was still one of the largest fund families in 2003, and CEO Larry Lasser had steered it through previous slowdowns. Its size and prominence belied rot within the organization, though. News in October 2003 that four of the firm’s portfolio managers had betrayed shareholders by market-timing their own funds exposed the decay. The firm’s compliance systems had flagged the offending trades to the firm’s executives, but they didn’t act until the SEC came looking; then they fired the managers. But that wasn’t all. Massachusetts Secretary of State Bill Galvin found earlier questionable trades. Lasser resigned in November 2003 and the firm implemented internal reforms and paid fines well into 2005. It proceeded with mixed success for the next two decades until Franklin Templeton announced plans to acquire it in May 2023; until the deal closes in 2024, Putnam retains an Average Parent rating.

From Juggernaut to Also-Ran

Situated far from Wall Street in the Western outpost of Denver, CO, Janus proved to be a 1990s market darling. Its cadre of star portfolio managers constructed aggressive-growth portfolios filled with tech, media, and telecom stocks that soared in the late 1990s. The 2000-02 dot-com bust exposed a major weakness, though: Multiple portfolios held the same torpedoed names partly because the firm’s analysts and managers didn’t cover much beyond TMT stocks. Investors lost big and left in droves.

The firm needed a way to bring assets back. Unfortunately, it went about it the wrong way. It allowed certain accounts to market-time its funds in exchange for keeping assets in other funds. This unseemly quid pro quo made it clear that Janus was putting its own profits ahead of its fundholders’ interests. Janus paid $132 million in SEC fines and restitution.

The firm subsequently improved its risk management and broadened its equity analyst coverage. Over the years, though, the firm has continued to struggle with inconsistent performance, portfolio-manager turnover, leaders who were poor cultural fits, and ineffectual acquisitions. The firm bought and sold quant manager INTECH and eventually swept away value boutique Perkins’ brand name after buying it. In 2017, Janus Capital Group and Henderson Group merged; this marriage brought complementary capabilities and lowered expenses on some Henderson funds, but it has yet to foster a cohesive culture or revive flows. The combined Janus Henderson brought in an outside CEO in 2022. The firm currently earns an Average Parent rating.

A Rally Derailed

Once, AllianceBernstein looked like the scandal’s comeback kid. It had to pay the most—$600 million including fee cuts—to settle charges it had allowed hedge funds to rapidly trade hundreds of millions of dollars in at least nine mutual funds. The firm’s then-CEO and Chairman, Lew Sanders, promised changes and delivered—for a while. Alliance Capital, a growth-oriented shop with a nervy sales culture, had bought the value-oriented Sanford C. Bernstein before the trading imbroglio in 2000, but executives from the more-conservative Bernstein, such as Sanders, asserted themselves after the scandal. Under Sanders, the firm cut fees, bolstered compliance, streamlined its lineup, avoided chasing trends, trained wholesalers to pitch portfolio solutions rather than hot funds, and hosted “symposiums” featuring speakers like Nobel Prize-winning behavioral finance guru Daniel Kahneman to burnish its image as a research house. It made considerable progress in changing its culture. Then, as fund performance and assets hemorrhaged in the 2007-09 global financial crisis, the firm’s majority owner, French insurer AXA, replaced Sanders with former investment banker Peter Kraus in December 2008. Kraus experimented with new ways to charge performance fees, pushed into alternatives, and shortened the firm’s name to AB. When he left in 2018, however, AB was still struggling with personnel turnover and mixed fund results, as it does today. Current CEO Seth Bernstein (no relation to the original Bernstein family) has focused on costs, moving AB back-office and sales operations to Nashville, Tenn. Its Parent Pillar rating remains Average.

Extreme Makeover

Invesco was going to fight; it refashioned itself instead. Invesco’s Denver-based retail fund arm (which was part of Amvescap with Houston-based AIM Funds), had been one of the 1990s’ fastest-growing fund families due to the success of its high-octane growth strategies. It’s no coincidence that, like its crosstown rival Janus, Invesco started allowing dozens of traders to rapidly swap its funds after the early 2000s tech-stock bust sapped its momentum and assets. Market timing of assets made up $1 billion of the firm’s assets at points, authorities alleged. At first, Invesco put up its dukes. It contended market timing wasn’t illegal and insisted it had protected investors by allowing certain large investors frequent trading privileges and then monitoring them, so they didn’t hurt long-term investors. As evidence mounted that the opposite was true and that AIM funds had let timers in, too, Amvescap capitulated and paid more than $450 million in penalties, disgorgement, and fee cuts to put the affair behind it. Today’s Invesco, which has since dropped the Amvescap and AIM names, would not recognize its old self. Former CEO Marty Flanagan, who retired on June 30, 2023, transformed the company after arriving from Franklin Templeton in 2005. It has become the world’s fourth-largest ETF purveyor since buying PowerShares in 2006 and the sixth-largest fund company overall owing, in part, to the acquisitions of Van Kampen in 2010 and OppenheimerFunds in 2018. The years and dealmaking have put a lot of distance between the firm and the scandal, but they’ve brought other challenges such as personnel turnover and mixed results across its unwieldy lineup. Its current Parent Pillar rating is Average.

The First Domino

Nations Funds, the asset-management arm of Bank of America BAC, followed a circuitous post-scandal route. Nations was the first fund firm cited in New York Attorney General Eliot Spitzer’s original September 2003 complaint, and he ordered it to remove executives that had approved market-timing arrangements with hedge fund Canary Capital. By April 2004, Bank of America had agreed to merge with FleetBoston Financial, owner of Columbia Funds, whose own market-timing activity led to the firing of co-presidents James Tambone and Louis Tasiopoulus. Bank of America paid $375 million in penalties and FleetBoston $140 million, and both firms agreed to cut fees in their combined, Columbia-branded funds.

Ameriprise Financial eventually bought Columbia from Bank of America in 2009. Its asset-management arm saw a series of other mergers and acquisitions in the ensuing decade and a half. Today, the collection of teams under the Columbia Threadneedle Investments banner earns an Average Parent Pillar rating.

Back to Basics

MFS launched the very first mutual fund in 1924, so getting dragged into the mutual fund trading scandal jeopardized a long legacy. The firm had a few things going for it, though. First, it had a supportive parent firm in Canada’s Sun Life. Second, it had a decent investment culture and commitments from several investment professionals to stay put.

There were other differences. Although it allowed certain traders to market-time specific funds, it didn’t have the kind of quid pro quo that other firms had. Those investors weren’t required to maintain assets in other MFS funds. The SEC found late trading in some MFS funds that had escaped the firm’s notice, however, and MFS paid a $225 million settlement.

Still, the firm’s response to these issues made a difference. It quickly fired the CEO and CIO who reigned during the scandal, and it weeded out portfolio managers who didn’t buy into key cultural changes. Those changes included emphasizing team portfolio management, mapping its fund lineup to specific portfolio roles, such as Morningstar Style Box positions, and discouraging high portfolio turnover. MFS also hired former Fidelity Investments president and SEC advisor Bob Pozen—as close to a mutual fund-industry celebrity as you could get—as its chair in February 2004. Pozen was instrumental in establishing a “tone at the top” of compliance while reestablishing credibility with clients.

Meanwhile, MFS put veteran investors in charge of its day-to-day operations. Fixed-income investors Rob Manning and Mike Roberge became, respectively, CEO and CIO. (Roberge succeeded Manning as CEO when he retired.) It also followed through on key incentive changes. MFS was among the first firms to change its distribution force’s compensation to encourage selling financial advisors multiple, complementary MFS funds instead of single funds. Current head of global distribution Carol Geremia has long been a long-term investing advocate.

Two decades after the scandal, MFS has emerged as a family that thinks long-term about how it invests, builds teams, plans for successions, and develops and maintains its strategy lineup. Getting swept up in the trading scandal was humbling, but it put the lessons learned to good use. That helped MFS recently earn a Parent Pillar rating upgrade to High from Above Average.

Above the Fray

Not all firms fell into the scandal’s morass, and many of those who sidestepped it remain compelling stewards. American Funds, whose portfolio managers took seriously the market-timing prohibitions contained in their fund prospectuses, continues to earn a High Parent Pillar rating. Fidelity Investments, too, avoided the scandal and was one of the more prominent voices in calling for trading reforms as the crisis unfolded; it’s an Above Average rated Parent. Vanguard, whose famous founder Jack Bogle had a history of criticizing his asset-management contemporaries for not putting investor interests first, also stayed clean and has long had a High Parent rating.

Correction: This article was updated to correct Carol Geremia's title to head of global distribution.

Correction: This article was updated to clarify that the Perkins' name was removed; some personnel and funds remain.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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