Investigations in Massachusetts and New York are rattling what’s left of consumer confidence in Wall Street.

When the market bubble burst after a headlong rise in technology stocks, many small investors saw their savings vanish. Compounding the problem, workers at companies such as WorldCom and Enron watched helplessly as their jobs and 401(k) dollars disappeared into a cloud of fraud and corporate bankruptcy.

Now investors hear from New York Attorney General Eliot L. Spitzer. He says at least four mutual fund companies cheated ordinary people out of their money to benefit wealthy market insiders. According to the Washington Post, he, along with the Security and Exchange Commission, is asking for information from at least 80 other companies.

Spitzer has named Bank of America Corp., Janus Capital Group Inc., Strong Capital Management Inc. and Bank One Corp. as allowing exceptions to their own rules that allowed large investors to profit at the expense of others who played by the rules. In one case, several companies are accused of allowing Canary Capital Management LLC, a hedge fund, to buy into mutual funds illegally. The hedge fund, along with founder Edward J. Stern, have agreed to pay a $10 million fine, return $30 million in profits and cooperate with Spitzer’s investigation, the Post reported.

Other improprieties include dubious sales incentives that encourage brokers to push their clients toward particular funds, which are more profitable for the selling company.

While the stock market has recovered some of its lost swagger, it has not reached the levels of return common during the bull periods of the mid and late-1990s, and the fees many brokerage firms charge have increased even while returns to investors have declined.

Self-regulation has failed to prevent these problems. While several firms have adopted rules that would discourage some of the biggest abuses in the mutual fund business and system-wide reform is promised, oversight and disclosure are the key elements to repairing the system.

The House Financial Services Committee has passed a bill that would do just that, and the Senate Finance Committee has scheduled hearings. Legislation is required to give the little guy protection against abuses by insiders.

With minuscule returns from savings accounts and certificates of deposit, mutual funds remain a good option for the typical investor. The funds can help protect a person’s savings against the daily, weekly and monthly fluctuation of the stock market. But stricter regulations and requirements that fund managers accurately and clearly explain their fees and commissions are necessary.

After allegations of corruption, extravagant pay for stock exchange executives and countless anecdotes of lost savings, the system needs a new jolt of accountability.

Forcing mutual funds to come clean on what they are charging their clients and regulating the practices that protect investors could go along way to restoring confidence in the financial markets, which have shown their vulnerability to manipulation.


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