Nov. 15–Charles Schwab, which has built a reputation as the little investor’s friend, revealed yesterday that it’s investigating mutual-fund trades that favored a select few.
The discount brokerage said there’s been after-hours trading in mutual funds it sells, which is illegal.
Its revelation opens a new chapter in the unfolding story of regulators’ investigations of the $7 trillion mutual-fund industry.
Schwab has examined 33 million trades made between January 2001 and June 2003, and “found a small number of trades that were entered or processed after hours,” said Greg Gable, a company spokesman.
He wouldn’t specify how many after-hours trades are being scrutinized by the company, but insisted that “the pool we are looking at is a very small percentage” of its total trades during that time period.
The illegal trades came to light because in September, the Securities and Exchange Commission sent a letter demanding data on Schwab’s mutual fund trades, Gable said. A spokesman for the SEC declined to discuss any investigation.
Schwab also said that state Attorney General Eliot Spitzer has slapped its U.S. Trust unit with subpoenas.
Spitzer’s spokeswoman, Juanita Scarlett, declined to comment on his probe.
But sources said the attorney general is looking at the possibility that there was after-hours trading in U.S. Trust’s Excelsior funds for hedge fund Canary Capital Partners — the firm that started the wave of scandal now washing over mutual-fund managers.
All this is ugly news for Schwab, which boasts that it serves Main Street, and has ridiculed the conduct of high-powered firms from Wall Street.
“They positioned themselves as a trusted advisor for the retail investor,” said Richard Repetto, an analyst at Sandler O’Neill who follows Schwab’s stock. “If they’re found guilty, it would certainly hurt their image and their brand. And because they’re a firm that serves retail investors, their brand really matters.”
The company’s stock took a hit yesterday, dropping $1.06, or 8 percent to $12.26.
Asked how Schwab will try to repair the damage to its reputation, Gable, the spokesman, said, “I hope that our actions will assure investors that what has occurred here is being solved — and we’re being forthright about our problems.”
The escalating scandal in the mutual-fund industry also hammered a host of brokerage stocks yesterday. Reports swept trading floors that the SEC plans to announce fresh charges on Monday against a major Wall Street firm for its mutual-fund sales practices.
Traders spent the day speculating on which investment bank the SEC might name Monday– driving down Morgan Stanley stock $2.75, or 5 percent, to $54.94 and Merrill Lynch down $2.13 to $56.47. Spokesmen for the firms said they do not comment on speculation.
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