Jury is out on punishing perpetrators of financial fraud

Last fall, all hell broke loose in the securities markets — a perfect storm with global fallout. No country escaped the impact of the monumental greed, corruption and sickness that had permeated U.S. markets.

Untold billions of investor dollars and savings disappeared, up in smoke, simply because the usual suspects, those “Masters of the Universe,” were allowed to perpetrate what can only be described as a massive fraud — conceived, planned and executed as never before. Make no mistake; it was the result of a deliberate, conscious effort to promote worthless manufactured securities that were sold as viable investment instruments.

Was it just an accident? Was no one aware of what was going on?

There are dozens of restaurants and watering holes in the downtown and midtown areas of Manhattan where those involved boasted of their investment genius by creating virtually worthless securities. These kinds of activities didn’t take place in a vacuum, because part of the game was the one-upmanship and bragging rights of the players involved. After all, these were the Masters of the Universe, often self-described as “financial engineers” — not research analysts or investment professionals.

How could this have happened on such a wide scale? It’s based on more than just the “greater fool” theory.

The perpetrators had to be permitted, encouraged and motivated to produce the worthless products they peddled to unsuspecting investors. And they had to have willing enablers as well. Who might be among the enablers?

Take a look — senior management, boards of directors, chief compliance officers and small armies of lawyers in legal departments reviewed these products and waved them through. And let’s not forget the so-called ratings agencies, which actually rated any number of these products as investment-worthy securities. Were they all looking the other way?

Virtually every investment firm of any size employs lawyers whose job it is to review and approve investment offerings to the public.

The job is simple: ensure that the investments are in compliance with all federal and state requirements for publicly offered securities. In fact, it’s unlikely in the extreme that financial products would be approved without being studied and reviewed by one or more legal/compliance types employed for this purpose. It’s their job. Products or investments would not get out of the door without first being examined and reviewed for compliance with all aspects of applicable regulatory requirements.

Every firm involved has its own in-house legal/compliance department plus outside counsel, which might also be involved in the review process.

In addition, it’s also possible that one or more of the staff lawyers had been employed by the Securities and Exchange Commission and “transitioned” to their new employers, which raises additional issues.

I firmly believe that mutual funds are the worst possible investment for the public, except for all other investments available.

And that’s the point. As this is written, I am not aware of hints that any open-end mutual fund managers or advisory organizations contributed to what occurred.

I believe that these well-managed mutual funds will recover. Smart, capable portfolio managers haven’t suddenly lost their ability to manage money competently. But it will take some time for markets to stabilize, which will happen as investors’ confidence is restored.

Of course we’ve experienced difficult market periods in the past, although not as severe as this one. Nevertheless, anyone who sells the United States short and gives up on equity investments will never participate in the recovery that is surely ahead of us.

The recovery will come when those in the legal profession step up and initiate actions against dishonest, manipulative marketing machines, including the executives and boards of directors who acted as bystanders while all this unfolded.

And it will happen only when the regulatory authorities go after the Masters of the Universe.

Dan Calabria, who had a 42-year career in the mutual fund industry, retired in 1992 as president and chief executive of Templeton Funds Inc. of St. Petersburg, Fla.

Related Topics: ING Group