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SEC Faulted in Fund Abuses

Friday, April 22, 2005; Page E02

The Securities and Exchange Commission failed to uncover abuses in the mutual fund industry because it had other priorities, the Government Accountability Office has found. In a report to be released today, the GAO says the SEC's inspectors should have detected so-called market-timing abuses, which cost investors billions of dollars, before they were exposed by New York Attorney General Eliot L. Spitzer. His actions began a September 2003 crackdown industry-wide. The GAO's findings point especially to the SEC's Office of Compliance Inspections and Examinations. Its director, Lori Richards, wrote in a recent letter to the GAO investigators that after the fund misconduct came to light, "the SEC took comprehensive action, including . . . enhanced examination oversight." SEC spokesman John Nester declined further comment.

Time Warner, Comcast to Buy Adelphia

Time Warner and Comcast have sealed a deal to purchase the assets of Adelphia Communications, the bankrupt cable TV company. The $17.6 billion cash-and-stock deal would also allow Time Warner to issue shares in its cable subsidiary, opening the possibility of even more consolidation in the cable industry. With the purchase, Comcast would maintain its lead as the largest cable TV company in the country, with 23.3 million customers, and Time Warner would remain No. 2 with 14.4 million subscribers. The deal must still be approved by regulators and a bankruptcy court, and the companies said the multipart deal could take up to another year to close.

The Nuclear Regulatory Commission proposed a record $5.45 million fine against FirstEnergy Nuclear Operating after leaking acid ate nearly all the way through a six-inch-thick steel cap on a reactor vessel at its Davis-Besse plant in Ohio, above. The NRC said FirstEnergy restarted the plant in 2000 without completing a cleaning and inspection of the reactor vessel head, then misled the agency about what it had done. The NRC also said it is banning one of the company's former engineers from working in the nuclear industry for five years. (Firstenergy Nuclear Operating Co. Via AP)

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Kenneth L. Lay, the former Enron chairman, will not have to stand trial on bank fraud charges before he is tried in the larger fraud and conspiracy case stemming from Enron's collapse. U.S. District Judge Simeon T. Lake III in Houston granted Lay's request to schedule the bank fraud trial during deliberations in the broader case, which is scheduled to start in January. Lay's lawyer said an early trial on the banking charges would increase the risk of juror bias in the larger case. Lay has pleaded not guilty to all charges.

Richard M. Scrushy's defense at his fraud trial began with questioning an FBI agent about evidence-gathering methods. Earlier, the presiding judge refused to dismiss most of the charges against the ousted HealthSouth chief executive. U.S. District Judge Karon O. Bowdre let stand charges of conspiracy and securities, wire and mail fraud but dismissed one of three charges under the Sarbanes-Oxley Act, which makes it a crime to certify false financial reports. Scrushy, 52, blames the $2.7 billion accounting fraud on 15 executives who pleaded guilty.

Yahoo has pledged to give the family of a Marine killed in Iraq full access to their son's e-mail account, ending a court battle that began after his parents sought messages he wrote before his death. A Michigan judge signed an order directing Yahoo to provide the contents of the e-mail account used by Lance Cpl. Justin M. Ellsworth, who was killed at age 20 on Nov. 13 while inspecting a bomb.

American International Group's board of directors has restructured its executive committee, added two directors and strengthened governance measures in the wake of investigations into reinsurance transactions. The board established two new committees: regulatory, compliance and legal; and public policy and social responsibility. With the addition of directors George L. Miles Jr. and Morris W. Offit, more than two-thirds of the board members are AIG outsiders. Separately, AIG said its deputy comptroller, Vincent Cantwell, took leave starting last week. The insurer declined to provide a reason.

Economic signals were mixed. The Conference Board said its composite index of leading economic indicators fell 0.4 percent last month, to 115.1, following a 0.1 percent rise in February and a revised 0.3 percent decline in January. Meanwhile, a Federal Reserve Bank of Philadelphia report pointed to stronger-than-expected growth in mid-Atlantic manufacturing in April. The Labor Department also reported that the number of first-time unemployment claims fell by 36,000 last week, the biggest drop in three years.

Vanguard Group slashed expenses for 350,000 customers as it stepped up price competition with rival Fidelity Investments. Investors with at least $100,000 will qualify for annual fees as low as 0.09 percent of assets, compared with a previous low of 0.18 percent for investors with at least $250,000, Vanguard said. Fidelity has about $950 billion in mutual fund assets, and Vanguard has $825 billion.

Guillaume Pollet, a former managing director at S.G. Cowen Securities, pleaded guilty to insider trading for selling shares of Rockville-based HealthExtras short in 2001 after he learned the company planned a private-equity offering. Also, the Securities and Exchange Commission charged Pollet with fraud and insider trading, saying he engaged in short selling of shares of 10 companies that were involved in private investment in public equity, or PIPEs, some of which were structured by S.G. Cowen. Pollet's short sales "locked in" more than $4 million in trading profit for S.G. Cowen, the SEC said. The SEC suit is its first attempt to punish alleged abuses in the PIPEs market, said Mark K. Schonfeld, director of the SEC's Northeast office.

Mortgage rates fell. Freddie Mac said rates on 30-year, fixed-rate mortgages averaged 5.8 percent this week, down from 5.91 percent last week. Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, fell to 5.36 percent from 5.46 percent. Rates on one-year adjustable-rate mortgages dropped to 4.26 percent from 4.3 percent.

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