Evidence of market manipulation By Mark Hulbert, CBS.MarketWatch.com Last Update: 12:01 AM ET July 2, 2003 ANNANDALE, Va. (CBS.MW) -- Is the stock market being manipulated? Is the Pope Catholic? The latest evidence of manipulation came Monday, the last day of the quarter. On that day, the majority of mutual funds beat the market. While that would seem to be a mathematical impossibility, researchers take it as evidence of a manipulative practice that is known in the mutual fund world as "marking the close." The SEC defines "marking the close," which is illegal, as "attempting to influence the closing price of a stock by executing purchase or sale orders at or near the close of the market." Right before the close, in other words, funds will place buy orders on stocks that they already own. That will cause the prices of their stocks to rise and thus make the performances of their funds look better than they otherwise would. Four researchers, led by Mark Carhart, co-head of quantitative strategies at Goldman Sachs Asset Management, have collected overwhelming evidence that mutual funds have engaged in this illegal behavior for years. For example, they found that trading volume tends to spike significantly in the final minutes before the close of each quarter in the very stocks that top mutual funds are holding. (Their research, "Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds," appeared in the April 2002 issue of the Journal of Finance. Those interested in a more detailed discussion of their research should read an article I wrote about it in the Oct. 6, 2002, New York Times. I should also note that I have witnessed investment newsletters engaging in this practice in an attempt to boost their Hulbert Financial Digest performance ratings.)