In the month since eliot Spitzer aimed his cleanup crusade at improper trading in mutual funds, one crucial sector of the financial industry has escaped charges: mutual funds. The New York Attorney General has uncovered alleged wrongdoing by hedge funds, brokers, and traders ―all vital cogs in the selling and administration of mutual funds. But the $7 trillion industry, while tarred in the headlines, has largely escaped the charges that are wracking its customers and business partners. Not for much longer. Enforcement officials say their wide-ranging probe is uncovering abuses that will soon go straight to the heart of the fund industry. Upcoming cases will show that mutual funds were active participants in two of the three major types of wrongdoing that investigators have brought to light. That isn't all. BusinessWeek has learned the Securities & Exchange Commission has found that some mutual funds are selectively disclosing their portfolio holdings to hedge funds, which then trade on the info. The agency, which has joined Spitzer's probe with brio, is considering bringing insider-trading charges against the funds involved. Moreover, the SEC is mulling an aggressive legal strategy that could result in fraud charges against mutual funds for the practice known as market timing, or the rapid trading of a fund. Since the probe began, securities lawyers have maintained that most funds would be insulated from such charges unless they violated a stated policy banning rapid trades. But the agency will probably argue that even those who didn't explicitly ban such trades violated their fiduciary duties to other shareholders.
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