Posted on 09/07/2003 11:57:45 AM PDT by lelio
"Janus (JNS:NYSE - commentary - research) Apologizes" is an unlikely phrase that merits comparisons to "Garbo Laughs!" Janus was the fund shop that made no apologies for its aggressive growth, heavily concentrated approach to investing that led to explosive returns and new investor dollars in the 1990s and an implosion during the bear market.
Well, it's been a topsy-turvy week for Janus Capital Group after New York Attorney General Eliot Spitzer named Janus as one of the fund firms that enabled hedge fund Canary Capital to make money in its funds to the detriment of individual fund holders. The unofficial "no apologies" policy was shelved as the company acknowledged it allowed market timing in some of its funds and announced measures to address the issues raised by Spitzer.
In a news release late Friday, Janus said it has hired an outside firm to evaluate whether there was a monetary impact to any funds in which Janus permitted "discretionary market-timing arrangements." If investors in the funds lost any money due to these arrangements, Janus will provide restitution, the news release said. The Denver-based shop also said it will return to shareholders in the affected funds all management and advisory fees it received from market-timing activities, which represents less than one-half of 1% of Janus' $150 billion in assets -- or less than $750 million.
"Our business is built on trust, and I personally apologize for any concerns we've caused our investors," said Mark Whiston, chief executive of Janus Capital.
Janus also said is cooperating fully with state and federal authorities to resolve this matter. Also, the firm said it would work with regulators and would support uniform rules to regulate and restrict market timing. The firm didn't say which funds were involved, but Mercury and High-Yield were the two funds named in Spitzer's complaint.
The measures represent a sweeping attempt by Janus to acknowledge its behavior, make amends with fund holders and quickly head off a potential scandal that threatens the firm's livelihood.
Janus was also quick to note that market timing wasn't a Janus-only issue. "We've long viewed market timing as an industrywide problem involving both mutual funds and the many intermediaries with whom investors work," Whiston said. "Regardless, we have to do what's right for our fund shareholders."
Later in the release, Janus said for any efforts to restrict market timing to be effective, "these rules must apply to all mutual funds and intermediaries, as well as to the unregulated hedge fund industry."
Indeed, market timing is a rampant problem in mutual funds that steals money out of fund investors' pockets -- costing U.S. funds an estimated $4 billion a year. "There are managers out there who make their living on market timing," said Mercer Bullard, founder of fund-investor advocacy group Fund Democracy. When a hedge fund or some other investor tries to market time a fund, they exploit a loophole in the way funds are priced. Since a fund's net asset value, or NAV, is calculated once a day -- traders can move in and make free money off the static NAV. (Click here for a story explaining the details of how this works.)
The key difference between the actions of the four companies named in Spitzer's complaint -- Janus, Bank One (ONE:NYSE - commentary - research) , Strong and Bank of America (BAC:NYSE - commentary - research) -- and much of the mutual fund industry is that market timing is an industrywide problem that firms try to combat.
Many firms put systems in place to block market timing -- such as redemption fees, fair-value pricing and imposing trading limits. Other fund firms don't police market timing as aggressively. A handful of others, such as Janus, have opted to cut deals with market timers in which both sides profit. What did the fund firms get? Money from Canary parked in money-market funds, which means fatter fees paid to the firms.
These market-timing arrangements were never disclosed by Janus -- until the news release Friday night, two days after Spitzer's complaint.
"It's our hope that the measures we're announcing today will help resolve this situation in a way that recognizes the importance of the matter," Whiston said in the statement. "Most of all, we hope this action demonstrates that Janus is committed to living up to the high ethical standards that our shareholders expect of us."
Furthermore, perhaps the journalists don't understand, but it is not "market timing" that was the problem here. Market timing is legal. Many hedge funds attempt to move in and out of other assets baskets (in this case mutual funds) when those baskets are not valued in real time. That is not what was happening here. What was happening here is that one investor was allowed to buy the mutual funds under circumstances that other investors were not allowed to do.
"First off, there is no gray to this violation. It is three feet the other side of the clear black line. There were no attorneys who would tell their clients that this was aggressive but within the guidelines. No counting of the angels on the head of a pin logic by the legal types who tell the client what they want to hear. This was clearly breaking the law."
"I can see one guy doing so and getting kick-backs and bribes. But this was evidently sanctioned by management. They had to know that it was career ending, if not jail time, if they got caught. How can a few extra dollars be worth such a catastrophic risk if you get caught? If two people know a secret, it is no longer a secret. Someone was bound to find out."
Market Timers or Market Cheaters?
Richard W.
In fact, it was so wide, we just didn't know who to expose first, and in all fairness, our fund shareholders should sacrifice equally with those of other firms."Regardless, we have to do what's right for our fund shareholders."
But since the Attorney General has narrowed our choices we know who to expose now, and besides, our shareholders have sacrificed enough.
COME BACK, SUCKERS
by IAN FRAZIER
NewYorker Issue of 2003-05-12
Posted 2003-05-05
What we said was true. You have to admit that. You got mad about it, when all we were telling you was the facts. We very much regret that you took what we said in the manner that you did. But let’s have a little acceptance of responsibility here—if you invest in a company that goes bust, and you lose your money, whose fault is that? The investor’s fault: your fault. The loyal employees of YessCo who put all their money in YessCo stocks, what were they thinking? Were they thinking? People like that, of course they’re going to get robbed. Did they sniff around, read some interoffice e-mail, ask a few questions about why the bosses were dumping stock? Did they even try to find out the bosses were dumping stock? They did not. So they lost everything they had. These folks were not on the ball.
It takes two to make a pump-and-dump stock scheme, don’t forget. It takes an ordinary person who wants to get some money and an idiot willing to lose it. Sorry—an investor, like yourself. But, hey, when you play, play to win. Find out who’s making calls to his broker from his jet, detect by your own native street smarts which financial analyst whose high-paying job it is to tell you the truth is actually lying to you. Measure the stress level in his voice on the telephone with a common device you can buy in any surveillance-equipment store. Use plain old common sense. We don’t have to paint you a picture. If you don’t keep these people honest, by knowing the same information they know and tracking them every minute, they’re going to get away with what they can. They’re gonna rip you off, if you let ’em. And . . . what can we say. You let ’em. We apologize if this truth is painful for you.
The market’s a self-correcting situation, you see, and you’re the one who self-corrects it. If you watch these people, then you can invest smart. Invest in a company on the basis of what a company says? What dummy would do that? Of course they’ll say anything.
We’re talking about only a few bad apples (as we call them), anyway. No more than five or seven, or maybe three dozen, that flat out want to swindle the dumb clucks who don’t happen to live in the Hamptons and go to the same parties they do. At the very most, eighty or maybe a hundred and some, or even a couple-three hundred crooked individuals in all. That’s a tiny number when you view it in perspective. Say there’s even as many as eight or ten thousand ready to clean you out down to your parking stubs. Still, that leaves—what?—seven billion people on the planet? By comparison, we’re talking about a very, very small number here. We heard that most of them were seasonal help and temp C.E.O.s who weren’t affiliated with us in an official capacity. And you don’t have to worry, because they’re basically all gone now, owing to the law of supply and demand.
It’s the nature of the animal, unfortunately. In any human community, be it a used-car lot or a street gang in L.A. or a Moroccan open-air bazaar, or anywhere, you’re going to have some unscrupulous people who abuse the public trust. Always has been, always will be. Investing is a crapshoot. We don’t have to tell you that. You accepted those terms from the beginning. With investing, maybe you win or, then again, maybe your 401(k) shrinks down to two weeks’ paid vacation before your final trip to Mass. General. We have always been up front with you. At no time did we give you reason to think this arrangement was anything other than what it is. You know the score. We always acted like grownups, you and us.
Right? Or are we wrong? Tell us. It feels like you can’t confide in us anymore. There’s a . . . remoteness. O.K., you need time to yourself. Regroup, lick your wounds—we can understand that. But don’t take it to an extreme. That would be highly irresponsible of you. When you allow yourself to lose confidence in us, you run the risk of destroying everything. If you don’t have confidence in us, force yourself to. Work hard on that particular goal. We will help you to attain it. That’s what we’re trying to do, with all our heart, right now.
Listen, we brought you something. G’head, open it. Ever see one of those before? That’s right, it’s a dividend. Try it on. Oh, that looks beautiful on you, with the chestnut brown of your portfolio. It brings out the color. You’re one of the most beautiful investors in the whole world, no kidding. We know, we haven’t been too attentive in the past about the little details, dividends and things, that mean a lot to an investor. We thought you understood how we felt and we didn’t need to do all that. Now we see that we do. Too often we omitted those small but important displays, and we learned our lesson. We’ll be better about giving you more of those from now on, we promise. Oh, and by the way—they’ll all be tax free. Already taken care of. Don’t mention it. It’s a change that’s long overdue.
We feel funny telling you this—we don’t even know if we should—but what the heck: the other day, on the street, we were talking to some associates and acquaintances whom we happened to bump into, and suddenly we said we loved you. For real. It just popped out. Everybody standing there listening, big as life, and we don’t know what came over us, we blurted out that we loved you. If you don’t believe us, ask Eliot Spitzer. He was standing right there.
Do we have to get down on our knees? If that’s what it takes, we will. We want you back. We’re asking in all sincerity and humility. From the opening bell every morning, you’re our whole world. Yes, accounting errors were made. No one disputes that. Life savings were misappropriated, regrettably. It will never, ever happen again, we swear to you. Increased anti-swindling safeguards are in place today because of the respect we have for you. You were hurt, and you had a right to be, but no amount of giving up yesterday’s mansions bought with stolen money can ever restore what’s gone. A wonderful future lies ahead, and we want you with us as a part of it. We need you to be there, with your boundless abundance and enthusiasm. So pick up the phone. Authorize the wire transfer. There will never be a better time to get back in than now. You know you still care for us. Please place the call. Please.
And by the way, where are the feds?
Even though Spitzer is doing more than anyone else, his actions normally end with slap on the hands fines and some bad PR for the criminals. So MER scams a couple of hundred million doing dirty deals and then pays a small fine if caught. It becomes the cost of doing business on Wall Street. Spitzer needs to put people in JAIL and then you can call him a hero. The SEC had to have known about the mutual fund scams. Makes a person wonder just what kind of unholy deals the cast of characters are making with each other and the crooks.
Richard W.
...Well, from now on anyway...
Normally, if you place an order after the close, you buy in at the closing price of the next day. These guys were buying in after the close at the current days closing price. So say a fund closes at 50 dollars at 4pm. At 4:30, IBM announces better than expected earnings. The fund is 2% invested in IBM. If you or I calls in at 5:00 to buy the fund, we will not get an advantage because we will be priced in at the next day's closing price - after the fund has increased in value due to the increase in IBM. These guys were being allowed to call in after the news and be priced in at the same days close.
That is just straight fraud on the part of the funds allowing them to do that. Yes, you could say that they are market timing, and Janus is trying to call it market timing. However, that is not what market timing is normally considered to mean.
Market timing, the legal kind, would work something like this:
Fidelity or Janus worldwide fund owns 10% of its assets in Italian stocks. The Italian market closes at 11:00 am US time. After 11:00 am, a number of italian stocks post better than expected earnings, meaning the next day the Italian stocks are likely to go up. The US mutual fund is still trading, so you buy into the US fund. AT 4:00 when the fund posts its net asset value, it uses the closing price in Italy. When a full 24 hours cycle through, you have hopefully bought into the US fund at an advantageous price that is based upon the "timing" of the market openings and closings.
There are all sorts of variations to this, whether you are tracking individual stocks, currency movements, or broad stock market movements.
It's not risk free. Just because one thing happened, it does not mean that something else won't happen to push it the other way.
This is what is traditionally meant by market timing, and its not easy as witnessed by the fact that the market timers are not known to make a whole lot of money. Plus, the funds were thought to discourage it, and many have rules such as if you buy or sell X many times in a year they impose various fees, etc.
By the way, anyone is allowed to do that sort of thing, you are free to get in the game.
You are not, however free to get in on buying a US funds shares after 4pm at that days closing price.
Canary was allowed to do that, at the expense of exisiting fund clients. In my opinion it is criminal on the part of the mutual funds and people ought to go to jail.
Last I heard the Feds were "complaining" that this might "interfer" with their own (lack of) investigation and (lack of) prosecution
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