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Lump of Coal Awards, Part 2


If the rest of the world were like the mutual fund business, Santa Claus could replace his elves with coal miners.

Fifteen months of scandals have shown that plenty of bad boys and girls in the fund world deserve coal in their Christmas stockings this year, and that's why it's time for the second installment in my Annual Lump of Coal Awards.

It takes more than dreadful performance or a whiff of scandal to earn a spot in my ninth annual awards. Lumps of Coal recognize managers, executives, firms and industry watchdogs for attitude, performance, action or behavior that is offensive, duplicitous, disingenuous, reprehensible or just plain stupid.

The first eight bituminous badges were awarded last week. The final Lumps of Coal for 2004 go to:

Fidelity Investments chief executive Edward C. "Ned" Johnson III for not knowing when to give up the fight.

Six months after failing to derail the Securities and Exchange Commission's new rule requiring every mutual fund board to have an independent chairman, Johnson is using back-room tactics hoping to buy the result he wants. The rule has been hailed by consumer advocates and most of the fund industry but decried by Johnson, who would be forced in early 2006 to step down as chairman of the family business, which happens to be the world's largest fund group.

While most opponents of the rule, including the Vanguard Group, gave up when the SEC voted to enact the new rule, Johnson leaned on New Hampshire Republican Sen. Judd Gregg to put a measure into a recent spending bill that will require the SEC to justify the need for independent chairmen. Fidelity Investments just happens to be Gregg's largest "interest group" supporter.

Even if the independent-chairman rule doesn't end fund scandals, there's a principle here, and Johnson is fighting on the wrong side. By putting his personal interests ahead of those of his shareholders, he proves why the rule is needed in the first place.

The people at AIM Investments, for forgetting what's in a name.

The big stadium in Denver is "Invesco Field at Mile High," which makes no sense now that scandal-ridden Invesco's funds have been merged into oblivion under the AIM banner. Invesco had a 20-year naming rights deal for the field, so AIM is paying to market a fund company that barely exists, hardly a great use of those 12b-1 fees for "sales and marketing" of the funds.

As for the stadium, "AIM High Field" sounds about right to me.

John Montgomery of the Bridgeway Funds, for running his ship so tightly that it missed some of the basics.

Montgomery is one of the world's top fund managers, and his firm is one of the best because it keeps costs reasonable, puts shareholders first and more.

But the SEC tagged Montgomery this year for improperly calculating fund management fees. While he took full responsibility for the unintentional error, the reality is that somebody in his organization should have known that the math was wrong.

Accountability is good, but proper accounting is better. Bad math can be every bit as damaging to shareholders as management shenanigans.

Putnam Investments, for putting the gold in Lawrence J. Lasser's parachute and then guaranteeing his safe landing.

Lasser's reward for allowing Putnam to get dragged into the scandals was a $78 million severance payoff. Worse yet, Putnam agreed to cover all future legal costs stemming from Lasser's deeds.

For all Lasser did to soil the company's reputation - for the employees and shareholders who suffered from his mismanagement - Putnam needed to put up a good fight, even if that wasn't the most expedient thing to do.

Instead, Putnam sent the wrong message, again.

Gary L. Pilgrim and Harold J. Baxter, for the most egregious breach of trust in the history of the fund industry.

The co-founders of bull-market darling Pilgrim Baxter & Associates basically let their buddies pillage the PBHG funds for their own personal gain. They paid fines of $160 million and accepted lifetime bans from the securities business, but it hardly feels like enough for destroying shareholder trust. (Pilgrim and Baxter sold their firm for about $400 million in 2000.)

The U.S. Department of Justice for not finding criminal charges for Pilgrim and Baxter.

Securities regulators need to look for new routes to attack the bad guys, and a criminal charge for these thieves would have sent a bigger message than the fines.

Average fund investors for selling out their belief system.

The scandals have proven that performance outweighs problems. Scandalized firms have seen huge outflows, but only in bad funds. Top-rated funds keep drawing more money, even if the management company has behaved poorly.

Investors should not have situational ethics. If you find the wrongdoings offensive, they're bad news regardless of performance.

Garrett R. Van Wagoner, the Lump of Coal (Mis)Manager of the Year for the second time in three years.

Van Wagoner was nailed by regulators this year for betraying "the trust investors place in mutual fund directors and managers to report their funds' market values accurately." He and his firm paid $800,000 to settle charges of mispricing securities and defrauding investors.

Van Wagoner had to step down as president of his management firm but got to keep running his funds. Had regulators wanted to protect shareholders, they would have given Van Wagoner the boot completely. Van Wagoner's three funds are all off at least 14 percent this year, ranking them all among the 25 biggest stock fund losers for 2004. No matter how much coal these funds get buried under, it's unlikely they will heat up enough for investors to feel good about them again.

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