http://cbs.marketwatch.com/news/story.asp?guid={D0B93BD3-04AB-4FDC-9F63-A2F09B119551}&siteid=mktw Your fund managers: liars and crooks I'm mad as hell; it's time somebody tells the truth By Paul B. Farrell, CBS.MarketWatch.com Last Update: 5:27 PM ET Nov. 5, 2003 LOS ANGELES (CBS.MW) -- "The mutual fund industry is now the world's largest skimming operation," said Sen. Peter Fitzgerald at this week's Congressional hearings, "a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation's household, college and retirement savings." CBS MARKETWATCH PERSONAL FINANCE So how did the fund industry respond to this indictment? With remorse? An apology? Some humility? Perhaps honesty? No, because they still don't get it. They don't realize that the fund industry itself is under an even bigger indictment. Not Spitzer's. But an indictment by America's 95 million investors. And yet, they still don't get it! Listen to their weasel words before the Senate of the United States: "The bedrock principle of the mutual fund industry is that the interests of the mutual fund investor always come first," said Matthew Fink President of the Investment Company Institute (ICI), the industry's lobbying organization. Stop! Freeze frame: Folks that's a bold-faced lie. Always first? But that's the problem, their culture is so pervasively unethical they have lost touch with reality and can't be honest. Well, I'm through mincing my words and pussyfooting around folks: The truth is, the fund industry is just a bunch of common crooks and liars. Did Strong and Putnam put investors first? What's wrong with these guys? Did Dick Strong and Putnam's boss put the interests of the investor first? And what about Janus, Security Trust, Prudential, Alger, Alliance, Bank of America and the other fund companies, the 401(k) plan managers, brokers, advisers and middlemen committing secret unethical and illegal acts? Did the investor "always come first" with all those crooks? No! Investors know these guys are lying. Now the Senate does too. So let's stop being polite. Lying is the least of their crimes. Arthur Levitt was right: "America's investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask." Admit it, your fund industry is lying to you, and it isn't just a small minority of liars. They all know this behavior has been going on for a long time. It's so deeply imbedded in their culture, nobody inside would blow the whistle because everyone in the fund industry has dirty hands, everyone's got something to hide. In fact, even now we are only seeing the tip of the iceberg. America's corrupt fund industry is not just deceiving the investing public, they are in denial about their own unethical and illegal behavior. They are lying to themselves by trying to convince themselves that they put investors first. The mutual fund industry never puts the investor first. And the ICI has been lying to everyone about this bogus goal forever while putting its own interests first. So watch out you guys, lying to a Congressional committee is perjury and that's another criminal offense. Funds rejected duty to put investors first Back in June Jack Bogle challenged the fund industry on this very issue: Their main fiduciary duty. When Bogle testified before Rep. U.S. Richard Baker's House subcommittee hearings on fund reforms, he recommended that Congress add one very important change. Bogle said that the industry should be forced to put the investor first as originally intended in the Securities Act of 1940: "The industry needs a change of heart, one in which our very focus changes, from placing the interests of the managers first to placing the interests of shareholders first." Bogle knew this change would never come about without legislation. So Bogle suggested the Securities Act 1940 be amended: "It would call for an express standard of fiduciary duty on the part of directors to act in precisely the manner called for by the preamble: A fiduciary duty to place the interest of fund shareholders ahead of the interests of fund managers ..." But the fund industry killed the idea: Not only did the fund managers not want this duty to put their investors first imposed on them, they killed the entire reform bill. That was July. Now their callous disregard for their fiduciary duty is coming back to haunt them. For decades the ICI has portrayed itself as a scandal-free society of elite professionals. In truth, the ICI has been at the center of a well-funded lobbying machine coordinating a cartel of fund managers and owners. Jack Bogle calls it a "conspiracy of silence." Former SEC chairman Arthur Levitt exposed the fund industry's hypocrisy in his book "Take On The Street." Funds are "eager to be seen as pro-investor, but the truth is they aren't." The fund industry is a "cutthroat business" that regularly "misleads investors ... thrives on hype ... withholds important information" and doesn't "want you to know a lot about what goes on behind the curtain at fund headquarters." In short, Spitzer could make a good case that the ICI itself should be charged with criminal conspiracy under the RICO statutes that have been used effectively against the mafia and other conspiracies taking advantage of the public trust. Evidence that the industry puts itself first There is considerable evidence for Jack Bogle's and Arthur Levitt's broad indictments. During the bear market (2000-2003) investors lost $8 trillion, over 40 percent their asset value. However, fund managers, owners and directors didn't suffer much. They made more than $200 billion annually while their average expense ratio increased by 36 percent. Here are the details: Fund managers: Compensation increased 35 percent (1999-2001) to an average of $436,500. Managers with 10-20 years experience made $761,500. The highest-paid 10 percent expected $1.8 million -- while investors lost over 40 percent! Fund directors: These crooks voted themselves a 26 percent pay raise to an average of $249,500. Not bad for part-time work. Fund owners: Fidelity's two controlling owners increased their wealth from $11.1 billion to $12.3 billion between 1999 and 2002. The head of another fund company made $47 million in 2001 while his investors lost 43 percent over three years. Many other fund executives voted themselves raises while markets were collapsing. Did these people put investors first? No. The truth is that fund managers, directors and owners have always put their own personal interests first. Then they have the gall to lie about it to your face, and after that repeat the lie before a Senate committee. These guys are some real bad dudes, common crooks and liars who cannot be trusted.