EDITORIAL
Mutual fund scandal demands fresh rules

News of rather heavy exposure of retirement funds for state and county employees and pensioners in Putnam Investments is the latest indication of the seriousness of the growing national scandal in the mutual fund industry.

Indeed, this scandal, by the time it is fully ripe, may rival the crime wave that savaged such companies, their shareholders and employees as Enron, Tyco and Global Crossing a couple of years ago.

It's no comfort to learn that once again the whistle-blower is not the federal Securities and Exchange Commission, even though it's under new leadership, but New York state's attorney general, Eliot Spitzer.

We won't begin to gauge the depth of this scandal until we are shown a mutual fund company that has not engaged in any of the illegal or unethical practices alleged at Putnam, Invesco Funds, Strong Capital Management, Federated Investors, Fred Alger Management, Prudential Securities, Alliance Capital Management, Janus Capital Group, Bank of America and Bank One.

As shocking as it was to see ordinary hourly wage-earners lose their retirements at management-pirated companies like Enron, mutual funds function as the investment choice of mom-and-pop workers for their 401(k)s and IRAs. Such investors, of course, are usually the last ones out the door and thus the worst hurt.

It may be unsettling to state and city workers and pensioners to see that management of their retirement funds is anything but nimble. ERS has fired Putnam, but not before $9.7 billion had fled the fund.

This is an even bigger problem for the 8,250 investors in the Putnam New Opportunities fund, still retained by the state's Deferred Compensation Plan, than for those county and state pensioners and workers at the ERS, for which Putnam had been managing direct equity investments.

The budding mutual fund scandal is another sign that, despite assurances of the Bush administration to the contrary, investment regulation is as close to laissez faire as it has been in decades.

No one in government objected when mutual funds latched onto high-flying stocks in the late '90s and rode them all the way down. The same systemic problems that aggravated the stock scandals — directors and regulators snoozing, greedy managers skimming the profits of long-term shareholders — are now evident at mutual funds.

Congress can't rely on the White House to restore investor confidence. It must act.