Wall Street WARZONE

Jones vs Harris: Supreme Court Screws 95 million Main Street Investors, Favoring “Casino Croupiers” (Rich Owners!) Ripping-Off 35% of Your Returns

by Paul B Farrell, JD, PhD
| | 4/1/2010

America’s pro-management/anti-investor Supreme Court’s at it again. Read columnist John Waggoner’s “Mutual fund fees case goes back to lower court” in USAToday. In essence, the Court has once again approved of big owners siphoning off a third of the profits from America’s 95 million Main Street investors’ money. That’s what Vanguard’s founder Jack Bogle has been telling investors for decades. Owners get away with it. The SEC’s no help. Now the Supreme Court again agrees! Bogle compares fund company owners to Vegas gambling “croupiers,” where the “house always wins” by raking one-third off the top of the Main Street investor’s returns. Their scamming has been going on for decades, and still, our conservative pro-management Supreme Court rules in favor of Wall Street and the fund owners, just as they did in the 1982 case:

The Supreme Court decided by a 9-0 vote Tuesday to send a lawsuit challenging high mutual fund fees back to a lower court, a move that both sides hailed as a victory. In Jones v. Harris Associates, the plaintiffs alleged that Chicago-based Harris Associates overcharged shareholders in the Oakmark funds, which Harris manages. The plaintiffs, three Oakmark shareholders, said that Harris charged Oakmark shareholders nearly twice what it charged big institutional investors for essentially similar services. … The court ruled that courts must use the guidelines set out in a 1982 case, Gartenberg v. Merrill Lynch Asset Management, to determine whether fund fees are excessive. In Gartenberg, a lower court found fees must not be so large that they bear no relationship to the services rendered and could not have been the result of arm’s-length bargaining.

So your mutual funds can keep charging you as much money as they darn well please, as long as they can manipulate the numbers and don’t get caught. Fund company owners love the decision. Some contrarians note that the high court added: “Fund boards should take into consideration fees charged to institutional investors,” which are lower. But don’t count on it. For more, read Anna Prior’s article, “The Hidden Costs of Mutual Funds,” in The Journal. Like Bogle, Prior exposes more about the fund companies’ endless numbers game:

“Portfolio managers can rack up steep expenses buying and selling securities, but that burden isn’t reflected in a fund’s standard expense ratio. How much does it cost you to own a mutual fund? Probably a lot more than you think. Read the complete Investing in Funds: A Monthly Analysis report. In selecting mutual funds, most investors know to check the expense ratio, the standard measure of how costly a fund is to own. U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar … But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.”

Today, Adam Smith’s “Invisible Hand” is the crooked hand of your fund’s “casino croupier!”

Prior points to one way you can check on the trading costs funds are hiding from you: “While you can’t find a fund’s total trading-related costs, you can get a clue from a standard and imperfect measure of how much trading the fund is doing, called ‘turnover.’ Turnover, expressed as a percentage, shows at what rate stocks in the fund have been replaced. A stock fund that sold half its stocks and replaced them with an equal value in new stocks would have turnover of 50%,” thus hiding excessive trading costs.  

But the real bottom line is simple: America’s mutual funds are cheating 95 million investors by hiding information. And the SEC and Congress are in on the scam. As a result your funds really ‘are two or three times more costly than advertised.’ That’s not capitalism’s “invisible hand” at work, that the greedy hands of Wall Street and your fund owners and managers.

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