Mutual Fund Scandal

The first verdict in the market-timing scandal has come in with an acquittal on 27 accounts and a mistrial on the remaining four (the jury was deadlocked at 11-1 to acquit). The broker had been accused of helping a hedge fund, Canary Capital Partners, place trades to buy mutual fund shares after the 4:00 PM cutoff and still get the pre-cutoff price.

This is the first of NY Attorney General Eliot Spitzer’s cases to go to a jury. If he brought his strongest case first, this is not good news for the ambitious Spitzer.

More background information on the mutual fund scandal can be found here and here.

As a rule of thumb, if you were already a smart investor, you probably had little or nothing to worry about. Every one of the funds involved in the scandals was sold through intermediaries (brokers, financial planners, etc.) for fees or commissions. Not one of the no-load funds was involved at all, and these usually have lower fees. The largest no-load fund families include Vanguard, Fidelity, and T. Rowe Price. Investing on your own means doing your own research, but if you work alone, you can be sure there is no conflict of interest. Or as a great merchant puts it, “Suffer a little, save a lot.”

Too Late

Arthur Andersen received a bit of posthumous vindication yesterday when the US Supreme Court overturned their conviction on a charge of obstruction of justice. The jury, in later interviews, cited the destruction of documents as evidence of wrongdoing. Andersen was far from innocent, but I believed at the time that they had been convicted of the wrong crime. At the end of an audit, every bit of paper must be either (a) put in a workpaper binder, signed, reviewed, and put into storage; or (b) destroyed. Preliminary drafts and CYA files are not permitted in any accounting firm. The firm must stand behind its work product and have the “sufficient competent evidential matter” to document its audit opinion, and be able to support its reasoning. Alternative arguments and preliminary drafts are subject to discovery in legal proceedings, and keeping them undercuts the final decision. Every accounting firm (and law firm) uses a shredder.

The key question, which was not settled at the trial, was whether Andersen continued to destroy documents after it believed they would be used in an investigation. At some point, Enron was known to be a “busted audit” and an investigation was inevitable. The shredding should have stopped then.

“Trust is not a calculation”

I agree with Jeff Jarvis on this point. I wrote the following in a comment to Jeff’s post:

The “don’t be evil” slogan is either naive or disingenuous on Google’s part, because it’s based on a presumption that concentrated power can be managed by good intentions. Historically this proposition has rarely if ever been true. What really keeps power in check is accountability based on competition and openness. Google has competitors but the essence of Google’s position on openness is, “trust us.”

This is also the problem with Google’s TrustRank scheme. Rather than merely evaluate the trustworthiness of news providers on a case-by-case basis, as we do now, under TrustRank customers would also have to evaluate Google’s judgment in deciding which news sources are trustworthy. This might make sense for customers who share Google management’s biases but for everyone else it’s a burden.

Google is a network company par excellence. It knows how to add value by maximizing network opportunities for content providers. Where Google stumbles is in trying to add value by providing or managing content according to its own values hierarchy.

From what I can infer, Google’s TrustRank system is mainly a branding scheme — in this case, the brand is based on an automated method for vetting content according to Google management’s preferences. It sounds like NPR without the overhead. There’s nothing wrong with that but it isn’t special either. All news aggregators impose their biases to some extent, because they have to decide what’s news and what isn’t. Google’s proposal, if it is what it appears to be, amounts to another aggregation scheme, but one overlain with hubris about what used to be called “scientific methods” — i.e., the idea that by mechanizing selection rules one can remove human bias. It will be interesting to see what emerges — if Google actually implements the TrustRank concept — and how it fares in the marketplace.

UPDATE: Read Tim Oren’s comment on Jeff’s post for another view.

UPDATE2: Tim Oren’s second comment adds more reasons to be skeptical about the validity of my concerns.

Well-Done Corporate Blog

This term is not necessarily an oxymoron. The DVD Station blog is worth looking at. It’s a real blog rather than a reformatted FAQ, and it both comments and solicits comments on the company’s business practices. IOW it attempts to be a conversation, and I found it informative. (Disclosure: I am not a movie buff and only learned about DVD Station via an email from one of its marketing guys. But they seem like straight shooters who understand blogs, and their business model is interesting.)

Discussion Question

The discussion centering around my previous question about “What would you do if you were running General Motors?” was fun and generated a lot of worthwhile thoughts. So let’s try another one.

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