Blogs Worth a Click

 
PCs are not PC?
The Volokh Conspiracyhas a funny piece about LA County requiring that computer disk drive configurations not be described as master and slave. It sounds like they have taken the interim step of putting tape over the jumper setting connections. For the sake of consistency, they should probably also remove the master and slave cylinders from the brake systems of their vehicles, though they should feel free to continue driving. Hey, it's no skin off my nose -- they are unlikely to reach the Boston area with no brakes, and if they did, they would not seem entirely out of place.

Change of focus
You will probably continue to see generic rants here, since I am an excitable boy, but I'm trying to devote more attention to finance, accounting, and computers. You may have already noticed. These are topics that I can maybe give an informed opinion and maybe some useful information. Opinions without information are not exactly in short supply in the blogosphere.

With that in mind, another mystery has been solved. When it became apparent that MFS Investments was the subject of an investigation by the SEC, I wondered why the funds involved were domestic, rather than international, funds. There is little opportunity for market timing in domestic funds, since the funds are priced at the same time as their underlying securities. The only thing that made sense was late trading, which is illegal. That is exactly what happened, and it looks like the MFS shareholders were the victims of a corrupt brokerage and the hedge fund that kicked off the whole scandal, Canary Capital. Read about it here. It looks like the NYAG and SEC, together with the Comptroller of the Currency, are landing on the brokerage with both feet. The brokerage is being dissolved, and there are felony charges being brought (at last!). MFS itself looks clean.

 
More Fund Follies

I'm happy to see that my gift for prophecy is still working. Larry Lasser lasted less than a week after the expression of confidence by the board of directors.

Putnam is now joined by Fidelity, MFS, Scudder, Hancock, Loomis Sayles, and Pioneer.

There is a new issue here as well: directed brokerage. This is a system in which a fund sponsor asks a broker to push their funds in return for a larger share of the funds' portfolio trades. In effect, a marketing expense is turned into a cost for the shareholders. There are a lot of familiar names in this new investigation. MFS has already announced it will suspend the practice, which is not illegal and is disclosed to shareholders.

Directed brokerage may not be the only kind of dangerous liason in the fund industry. It would be interesting to see how fund sponsors deal with relationships with their other vendors, customers, and distribution channels. Do they have a control for their executives owning shares in their vendors, for example? At what level do the traditional perks and "gimmes" rise to the level of corruption? Golf? Golf clubs? A vintage Corvette? A rate break on a mortgage?

 
Mutual Fund Follies
Larry Lasser, the head of Putnam, has received an expression of "great confidence" from the chairman of Putnam's parent company, Marsh & McLennan. That is usually the kiss of death. Meanwhile, state pension funds are withdrawing (reg. req'd) from Putnam. Even Massachusetts, where Putnam is based, withdrew its $1.6 billion. With that kind of money walking out the door, can Lasser be far behind? Maybe another CEO might survive this, but Lasser is well known for his lavish compensation package and his unforgiving treatment of those employees who fail. You may remember that a good many equity managers were forced out after the funds' heavy investment in technology stocks stopped being a good idea. If he is held to the same standard, he should be scrounging empty copier paper boxes for packing his personal stuff.

When this particular scandal is over, what will be the next one? There could be trouble about the composition of the boards of directors for mutual funds. The position of director or trustee of a mutual fund is the best part-time job on the planet. Most make over $200,000 per year by serving on the boards of many individual funds in the fund family. They are always nominated by the fund management, and because there are seldom large individual holdings of fund shares, proxy fights are nearly nonexistent and alway unsuccessful. If a director proves to be too obnoxious or asks too many questions, what is there to stop the fund managers from leaving him out of the nomination next time? How independent can anyone be when judging the performance of a company paying you so much for so little investment of time and effort?