Around 15 years ago there was a public scandal involving mutual funds. Some institutional investors were given after-market access to their fund accounts, if they parked enough assets.
Eliot Spitzer was then the Attorney General of New York. With information provided by a disgruntled ex-employee (of “Canary Capital” — what a fitting name!), he went after these fund managers.
His prosecutorial overreach lead to low-level managers ending up in jail for deleting emails, even though they had little to do with the original wrongdoing.
Before the scandal, I had started a blog and consulting service around fund expenses. I was spending 10 hours a day collecting and analyzing fund data. While going through some documents I noticed filing irregularities with a Putnam fund. I called up Putnam, but they were very dismissive. It angered me. I naively thought they’d hire me to help clean up their act.
I then wrote a piece on my site (long gone) which explained how Putnam was afoul of S.E.C. regulations. How it was cheating shareholders. I predicted that such faulty disclosure indicated worse things going on.
Was I trying to show off? Was I trying to help society?
When the scandal hit a few months later, reporters searching for more information found my reports. I had a wealth of data. They began calling me on a daily basis. I thought I was saving investors from greedy fund managers.
Every week I was quoted in the New York Times, Wall Street Journal, Barrons, Time Magazine, and so on.
I fed into Spitzer’s and the media’s appetite for a simplistic narrative about greedy Wall Street organizations. Investors (the public) ultimately didn’t want to pay me for my vigilance and certainly the industry didn’t want to send business to those who attack it.
The data I used lives in a no-man’s land between public disclosure and private fund communications to the S.E.C. The data is transmitted in computer-readable NSAR files through the public EDGAR system. Essentially, the S.E.C. didn’t want their analysts to spend days reading through every annual report, which are all worded and formatted differently (they’re meant to be printed). Instead, the S.E.C. had the fund fill out a standardized NSAR questionnaire which collects the essential information expected in the annual report. After downloading the files from EDGAR, I designed software to pull that information out and organize it as a database.
At some point, Putnam settled with Spitzer and the S.E.C.
A month later, I noticed, in the data, the same suspicious behavior going on in Putnam’s variable annuity funds. That’s when my eyes were opened about the goals and independence of the mainstream media.
Before I go on, let me recap. Someone sought revenge against their ex-employer, Canary Capital. They go to Spitzer with evidence of bad fiduciary behavior. Spitzer goes after each potentially complicit fund complex. The public follows the exposition of fund fraud through the media’s reporting of every press release from State AG offices and the S.E.C. The media uses me for quotes and charts to fill out each story. They call me an activist or gadfly.
So what would you think happens when an expert sees fraud that government agencies don’t see? Will the mainstream media run it?
Trump could have also said, “if I shot someone on 5th Avenue, right in front of 100 reporters, but the police didn’t report it, you wouldn’t see it in the news the next day.”
Some background. Mutual funds pool investor money into a portfolio of investments, say, stocks. Most funds are retail funds in that money comes directly from the investor. There are a second type of mutual fund which gets its money through an insurance contract. These are generally called Variable Annuity funds. Investors get a hybrid return of what the underlying funds deliver and what the insurance provides, in benefits, as part of the insurance contract.
The main point is the investor buy the insurance contract and doesn’t pay attention to the funds underneath it to which they have no control.
To the fund advisor, there is no difference, when managing the portfolio, between their retail version of the fund and their variable annuity version. They don’t see or care where the money comes in, through direct investments or insurance contracts. Whatever portfolio the advisor picks for the fund is replicated in both portfolios.
But in 2003 some fund managers understood what Spitzer didn’t. Almost no one gives much thought to what goes on in variable annuity funds. In other words, they are a dark-pool assets. Even today, if you try to look into the portfolios of VA funds you won’t find much data.
I had the data and expertise to see what was going on in those dark pools.
When Putnam agreed to pay a fine from Spitzer and the S.E.C.’s investigation, the portfolio managers probably suspected that the issue was settled. Therefore, they just continued with some of their practices in the variable annuity portion of the funds because they knew no one would notice.
I noticed. (From Enron forward, the S.E.C. has been slow and inept when it comes to analyzing their own data).
So I called a journalist at the Wall Street Journal who had already used my analysis in previous stories about the Putnam retail funds. I showed him all the evidence. He took it up with his editors. After days of discussion he said they wouldn’t run a story.
The WSJ journalist had told me to approach the government. I had already tried in the early days of the scandal. No one ever got back to me. At the time I didn’t understand that Eliot Spitzer didn’t care about the public or the facts. Not one iota. He just wanted to further his political career.
I wanted the WSJ to follow the story to the end. They wouldn’t. I had to face the fact that the WSJ isn’t in the truth business. Even if some portfolio managers were responsible, wouldn’t Putnam need to pay lawyers to limit the damage done by such a WSJ article? What would that cost be, for the WSJ to defend the story? Probably tens of thousands of dollars, at minimum. Would readers want to pay that in higher subscription fees? As much as I believed in the importance of my analysis, who am I to say how much, or what truth, people should or would pay for?
A year later the Wall Street Journal posted a few paragraphs that the portfolio managers of the Putnam VA funds were fired for what I suspected. Did I call the reporter to say “I told you so”? No. By that time I was surprised they ran a paragraph at all. The world had moved on.
The experience taught me first hand that there is usually an expert in the wings of every news story, an expert like me, who has a very good idea of what’s going on behind the “scene” depicted by the media.
As time unfolded, it became clear to everyone that Spitzer used the AG office to further his political career. He became governor of New York. The enemies he made from his prosecutorial overreach eventually caught up with him. A sexual picadillo that is typically easy for a politician to cover up became his ultimate undoing. What this implies, to me, is that most of the mutual fund scandal was politically fabricated.
It implies to me that most of what I read in the mainstream media is only the shallow part of the story.
A reasonable assessment of the damage to the public never mattered which is why government agencies never contacted me.
There are experts writing blogs who probably have a very good idea why that ex-spy was recently killed in the UK. For every story you read, you can probably find the truth, which you’ll have to assess, elsewhere. I didn’t understand how true that was 15 years ago. I do now.
It’s one of the greatest dramatic lines ever, Aaron Sorkin’s “You can’t handle the truth” from his play, “A Few Good Men.” For me, the real story begins after those lines are said.
Yet that’s where the story ends in our media. That’s where the story ends for almost everyone I know. I often wonder if that’s where it should have ended for me.