Canadian fund trading scams unlikely, consultant says

(September 26, 2003) A mutual fund trading scandal that has been called a “black eye” for the U.S. fund industry probably could not happen in Canada, according to a well-known industry consultant.

Earlier this month, Canary Capital agreed to pay $30 million US in restitution and a $10 million US fine following an investigation by New York Attorney General Eliot Spitzer, who said the hedge fund firm bent the rules by allowing after hours and short-term trading.

Canary made the illegal trades with several big-name U.S. mutual funds, Spitzer said, including Janus and Bank of America.

Although the U.S. and Canadian fund industries have many similarities, that doesn’t mean illegal trading also goes in this country, says author and CFA Steven Kelman in a commentary posted on Morningstar’s Web site.

“Some Canadian investors have asked their advisors whether they should be concerned,” Kelman wrote. “The answer is probably no. The Canadian fund industry is heavily regulated, heavily audited and is relatively small. If anyone tried to implement schemes in Canada similar to Canary’s, they would likely be noticed and talked about.”

Kelman says he’s not claiming that all Canadian mutual fund companies are squeaky clean, but he notes they are “rarely in the limelight on disciplinary matters.”

After-hours trading is prohibited because it allows investors to buy funds at the previous day’s price in response to good or bad news that won’t be reflected in the unit price until the next trading day, Kelman explains.

Short-term trading, also considered an unacceptable practice, takes advantages of quirks in mutual fund pricing, Kelman adds. “For example, a fund that invests in Japan will be priced at 4 p.m. New York time even though the Japanese market closed hours before. Any positive announcement made after the close of the Japanese market would be reflected in the following day’s pricing in New York. With this knowledge, a short-term trader would buy on the first day and sell on the second day, making a profit.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca