Trading scandal spreads to Schwab
By Josh Friedman
Los Angeles Times
San Francisco-based investment giant Charles Schwab Corp. said yesterday that it has uncovered evidence of possible improper or illegal trading in some of the 3,000 mutual funds it sells, bringing the deepening fund industry scandal to the doorstep of a firm that has long portrayed itself as a champion of individual investors.
Associated Press
Schwab said it found evidence of a "limited" amount of late trading by mutual fund customers — the illegal practice of buying and selling fund shares after the stock market's closing bell, but at that day's closing prices.
Investment giant Charles Schwab's advertising campaign touts its attention to small investors. Its role in the mutual fund trading scandal may tarnish that image.
In addition, a "small number of parties" were allowed to rapidly trade in and out of the Excelsior Funds run by Schwab's New York-based U.S. Trust unit — a practice the funds discourage because it can run up transaction costs and siphon profits from long-term investors.
The questionable trading was unearthed during an internal probe launched in September after the Securities and Exchange Commission and New York Attorney General Eliot Spitzer asked Schwab to turn over records of mutual fund trades from January 2001 through June 2003. Schwab said it fired two employees for trying to destroy evidence sought by regulators.
The revelations added a new wrinkle to the scandal sweeping through the $7-trillion mutual fund industry.
Schwab is one of the best-known brand names in the securities business and it's the first "fund supermarket" to come under scrutiny.
Schwab is only the 35th-largest manager of mutual fund assets, but its clout in the industry stems from its leading role as a distributor of other companies' funds to individual investors.
More than 5,500 independent financial advisers use the firm's online fund trading service, and the firm had 7.6 million customer accounts as of last month.
The 30-year-old company has crafted an image as a West Coast maverick taking on Wall Street. Founder Charles Schwab became a familiar face thanks in part to a series of folksy TV ads aimed at small investors. Last year the firm mocked Wall Street salesmanship in a commercial featuring a brokerage executive urging workers to hype a lousy stock with the cry: "Let's put some lipstick on this pig!"
In a note to clients yesterday, Lehman Bros. analyst Mark Constant said such posturing could backfire as the fund trading investigation unfolds.
Schwab said it was unclear whether it was a victim of traders who figured out how to gain an edge, or whether its employees knowingly helped those investors to the detriment of others.
"A very small number of trades may have been entered incorrectly against our policies," said Schwab spokesman Greg Gable.
