Jewish World Review Nov. 11, 2003 / 16 Mar-Cheshvan, 5764

Dan Gillmor

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Despite multitude of business scandals, there's reason to hope | If you own shares in one of the mutual funds that has been cheating small investors on behalf of favored clients and/or managers, you have every right to feel sick to your stomach - and furious. This is betrayal on an epic scale.

Epic, and depressing, because mutual funds were supposed to be the refuge for people like us. Now we learn that supposedly reputable funds have been just another cog in a financial wheel that, more and more, seems utterly rigged against everyone but the insiders.

Is there anything we can trust? How many more shoes are left to drop?

"If you're waiting for the last shoe, you have to realize this might be a centipede," says Joseph A. Grundfest, who served on the Securities and Exchange Commission under Presidents Reagan and the senior George Bush.

But Grundfest, now a professor of law and business at Stanford Law School, also urges a sense of perspective. This is the best advice of all at a time when it's tempting to see the entire market as hopelessly corrupt.

Here's why I'm finally beginning to get optimistic, even amid an apparently endless parade of sleaze. American capitalism is peering over a cliff, but there have to be enough sane and honorable capitalists who won't let the bad guys pull everyone else over the edge. It's a binary choice.

Small investors won't do the choosing, not in any immediate way. We have limited power, and if we all bail out of stocks and mutual funds we'll only hurt ourselves.

Donate to JWR

No, in the immediate term we're going to have to rely on two groups of people: big investors, especially pension funds, and the vast majority of business people who have remained honorable despite the lure of a flawed system that has almost encouraged corruption.

They aren't the crooks who have been occupying too many executive suites, and they aren't the manipulators who abuse trust through legal but unethical chicanery. But if they don't act, they will be culpable for the eventual collapse of investor confidence, and of the system itself.

Several state pension funds have pulled their money out of the klepto-funds. That's a good start, but only a start.

Institutional investors have been demanding better disclosure (though disclosure makes little difference when insiders are defrauding investors). They should gang up on executive-suite greed, too. Grossly excessive compensation is still endemic, and fundamentally outrageous.

One of the largest institutional investors, the California Public Employees' Retirement System, or CalPERS, took a stand last week for a more honest system when it said so-called reforms at the New York Stock Exchange didn't go nearly far enough. The NYSE has been a promoter and a regulator, a blatant conflict of interest.

One of the most disturbing facets of the ongoing parade of scandals has been the near-silence from high-profile executives. Their general unwillingness to go after their peers speaks volumes about their own values.

But when it comes to really fixing things, big-time capitalists need to face an uncomfortable truth: They need more government, not less, at least when it comes to enforcing fair business practices and ethical behavior.

The anti-government rhetoric from business has always been hypocritical. Government protects business from itself, and that leave-us-alone fervor tends to last only until a company or industry needs a special favor.

Business people complain about New York Attorney General Eliot Spitzer, but they need him. His office has been the single most important law enforcement agency when it comes to corporate crime. If the rest of us have any faith in the system, it's partly because Spitzer and his crew (and some colleagues in other states) have been on the case.

There have been signs of life in federal law enforcement. Congress toughened some laws in the wake of the Enron heist, but the SEC has been - and to an uncomfortable degree remains - a hapless industry lapdog. This has been true under Democratic and Republican administrations, and even with a somewhat more energized SEC it's still largely true.

Criminal prosecutors are on the job. Silicon Valley's former top investment banker, Frank Quattrone, faces another obstruction-of-justice trial after the first one resulted in a hung jury. The CEO of HealthSouth has finally been indicted. Some Enron executives face trials.

But why has MCI, which pulled off one of the most blatant financial frauds of our time, been allowed to stay in business? Why haven't more auditors been held to account? And why are Enron's former top two executives, Ken Lay and Jeff Skilling, not in jail by now?

Because, for one thing, it's hard to get the legal goods on people who can hire the best lawyers and disguise their tracks. Don't begrudge them their civil liberties - rather, celebrate the same rights that can keep truly innocent people from being railroaded.

We don't need a lower standard of justice for the rich and powerful. We do need more cops on the white-collar crime beat, lots and lots more. The business community should be pressing for vastly greater resources to enforce the law. If they talk, Congress will listen.

I did a small amount of talking myself last week. I sold my shares in a Putnam mutual fund, and, using the fund's Web feedback form I explained why. (The legalistic response confirmed my conviction that this was a bad operation.)

If you're tempted to do something similar with a fund you hold that's been caught up in the scandal, be careful. There could be unpleasant tax consequences selling so late in the year. (In my case there aren't any tax problems; I checked first.)

I plan to reinvest the money, and asked my financial adviser what I should do. Leave it in cash for the moment, he said, because the market is pretty frothy, as in possibly overvalued. Besides, he said, who knows what company or fund will be implicated next?

That's a scary sentiment, but a common one. There's still time to repair the system, and I sense that people in positions of power are beginning to understand something: Time could run out.

Every weekday publishes what many in Washington and in the media consider "must reading." Sign up for the daily JWR update. It's free. Just click here.

Dan Gillmor is a columnist for the San Jose Mercury News. Comment by clicking here.


© 2003, San Jose Mercury News Distributed by Knight Ridder/Tribune Information Services