Performance Eases the Sting of Scandal

The mutual-fund industry, embroiled in its first major scandal in a generation, has one major advantage as it battles to retain the shareholders’ trust — strong recent returns. Heady recent gains for most stock funds will no doubt take some of the sting out of the already bruising rounds of allegations, admissions, and investigations kicked off on Sept. 3 by New York Attorney General Eliot Spitzer. In his bombshell of a complaint, Spitzer outlined “special trading opportunities” that one hedge fund was able to secure from four major fund families. He cites this as evidence of widespread abuse of investor trust in the mutual-fund industry.

Since then, other securities regulators have promised to investigate the alleged trading abuses in the industry, and at least two firms mentioned, Janus (JNS) and Bank of America, have promised to make restitution to any shareholders who lost money in the discretionary trading deals that Spitzer brought to light.