Just a few get to use the shortcuts along the road to wealth


IT HAS BEEN every investor's daydream, inspiring escapist fiction at least since the Gilded Age: buying today's valuable asset at yesterday's depressed price.

In Mark Twain's Following the Equator, an Australian bum reaps a fortune by slitting open a shark's belly and retrieving a newspaper with word of a big rise in London wool prices - news that won't arrive by steamer for another month.

The people in Back to the Future II obtain a sports-score almanac published in the 21st century to make a killing on game bets in the 1950s.

The Economist magazine once posited an investor who traveled back in time to 1900 and each Dec. 31 thereafter put all his money into whichever asset was going to appreciate most for the new year - platinum, New York stocks, Brazilian bonds, whatever. The person ended up being worth the gross domestic product of the universe, as I recall.

But progress marches ever onward, and yesterday's fantasy has become a reality for the innovative folks on Wall Street. The industry that brought you stock-index futures has quietly rolled out a new product: mutual fund pasts.

Hedge-fund boss Edward J. Stern has been living the dream.

Thanks to a time machine allegedly supplied by Bank of America, Stern was able to back-date purchases of appreciated mutual fund shares, locking in an old price for assets that should have cost much more at the time he decided to buy, according to New York Attorney General Eliot Spitzer.

This allegedly occurred "hundreds" of times.

Stern's lackeys at Canary Capital Partners, according to legal documents, would contact Bank of America's Nations Funds group after 4 p.m., when stock markets had closed and mutual funds had fixed their daily prices, and were allowed to trade fund shares at the pre-4 p.m. price.

Spitzer gives no exact dates or examples, but it's not hard to imagine how somebody might book millions in ill-gotten gains through this technique.

Say it's Monday, April 15, 2002. The Dow Jones industrial average falls 97 points that day to 10,094, and at 4 p.m. mutual funds mark their closing prices accordingly. But a few minutes later, technology powerhouse Texas Instruments discloses sunny tidings: Its first-quarter results beat expectations and business is improving.

It doesn't take a genius to figure the news will prompt a broad stock increase the next day.

But it's too late for mutual-fund investors to get in on the rally. The deadline for Monday fund purchases was 4 p.m. If you buy Nations Funds shares at 5 p.m. you'll get the closing price for Tuesday - long after the Texas Instruments news will have helped push up the Dow by 2.1 percent and the Nasdaq by 3.6 percent.

Unless, of course, you have a special arrangement with your mutual fund company. According to prosecutors, Stern and Canary Capital Partners could wait until up to 6:30 p.m. to buy or sell Nations Funds shares at the pre-4 p.m. price - almost guaranteeing a profit the next day as they seized on post-closing developments. In return, Canary gave Bank of America millions in other business.

In practice many trades got complicated. Often Stern profited from impending market declines by selling fund shares in the wake of afternoon bad news at the pre-bad-news price, according to prosecutors, while simultaneously holding a "short-sale" position in a basket of stocks identical to the mutual fund.

The larger point is that Canary broke the rules, with the alleged blessing of Bank of America, at the expense of Bank of America's mutual fund customers. When your fund sells itself at a discount to others or buys itself at a markup, your stake gets diluted. And you lose.

Stern and Canary agreed to pay a $10 million penalty and regurgitate $30 million in what Spitzer called "illegal profits." New York and federal investigations continue, and state grand-larceny and securities-fraud charges have been lodged against Theodore Sihpol III, Canary's former Bank of America broker.

Bank of America says it is investigating and will reimburse mutual fund customers who were "adversely affected."

What's great about the case is that the practice went full-bore from 2000 until this July, when Spitzer found out. So much for "a new day on Wall Street."

Almost two years after the Enron scandal, a year after the WorldCom stink, months after Spitzer's landmark spanking of Wall Street, Bank of America, whose new slogan is "Higher Standards," apparently continued to diddle its customers.

If you're a Bank of America client, think seriously about whether those standards are high enough. As for me, I'm headed to March 24, 1986, where I'll be buying Microsoft at a split-adjusted price of 9 cents per share.

See you in the time tunnel.

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