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Streetwise: A scandal waiting to happen

The biggest ever mutual fund scandal is staring us in the face, reckons Henry Blodget. All that is needed is for an aggressive prosecutor to capitalize on the obvious.

Henry Blodget

ONE OF THE morals of recent financial scandals is that companies can no longer rely on industry regulators to determine what is or isn't okay. Aggressive prosecutors have not only cited infractions of existing laws – late-trading, bid-rigging, for example – but have also criminalized industry practices that have been rubber-stamped by regulators for years. Whether such practices are regarded as illegal or should be so regarded is almost beside the point. Allegations can be as damaging as convictions, so careful companies must comply not only with today's precedents but also tomorrow's.

Bear markets for stocks are bull markets for regulation, and this one might last a while. So even as fund companies lick wounds from late-trading and market-timing allegations, they should consider what's likely to hit next.

A loser's game

Academics have essentially proved that active fund management, for the fund customer, is a loser's game.

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