Mutual fund ties to insider probe may prolong withdrawals

BOSTON: Mutual funds’ ties to so-called expert networks that have been probed as part of an insider trading investigation may undermine efforts by the industry to stem three years of client withdrawals from stock funds.

Janus Capital and Wellington Management were among firms that received requests for information last week as part of an insider trading investigation involving hedge funds as well as MFs. None of the companies have been accused of wrongdoing.

The probe hits firms as they try to reverse $90 billion in withdrawals from US stock funds since the beginning of 2009. Damage from the industry’s last run-in with regulators, a series of trading scandals in 2003 and 2004, took years to repair and led to more than $3 billion in fines against more than two dozen firms.

“There was reputational damage from that scandal that took a long time to heal,” said Burton Greenwald, a fund-company consultant based in Philadelphia. “In an industry that handles people’s money and savings, reputation is enormously important.”

Both MFS and Wellington were clients of Broadband Research, a Portland, Oregonbased company that provides research to money managers and whose founder, John Kinnucan, was visited by federal officials as part of the probe.

Affiliated Managers Group’s Friess Associates, and the Columbia Management unit now owned by Ameriprise, have also been clients of the researcher, Kinnucan said in an interview. None of them have been accused of wrongdoing.

The crackdown on insider trading led by US Attorney Preet Bharara in Manhattan started in October 2009 with charges filed against Raj Rajaratnam’s Galleon Group. After Rajaratnam was arrested, his $3.7 billion firm received $1.3 billion in redemptions in a matter of days, and within a week, he had decided to liquidate the funds. Rajaratnam, who is awaiting trial, has denied any wrongdoing.