NASD probing fund trading

"It is a sizable number and, frankly, revelations of any sizable numbers are going to cause investors serious concern," the NASD's chief executive, Robert R. Glauber, said in an interview with Globe editors and reporters yesterday. "It's completely unacceptable behavior."

The number of NASD investigations offers further evidence of the extent of the scandal that's ripped through Wall Street and the mutual fund industry since early September, when New York Attorney General Eliot Spitzer disclosed trading abuses involving a New Jersey hedge fund and four mutual fund companies.

Glauber declined to name any of the firms involved, but said they included "significant" names in the securities and brokerage business. Separately, several former brokers and managers of Prudential Securities' Boston office were charged last week in fraud complaints by Massachusetts and federal regulators for allegedly using deceptive practices to hide repeated market-timing trades in mutual funds.

Glauber said the possible infractions under investigation were discovered after NASD and the Securities and Exchange Commission divided up a target list of the top firms in the securities and brokerage business to examine. The SEC studied 34 large Wall Street firms. It found 25 percent allowed customers to make late trades and 30 percent assisted customers in market timing in some way, Stephen M. Cutler, the agency's enforcement chief, said last week.

Meanwhile, the NASD "swept" another 160 firms, Glauber said, and may refer yet more cases to its enforcement division as the investigations continue. While he declined to specify what kind of possible infractions the NASD had uncovered, Glauber said, "This is stuff where it's worth the fairly scarce resources of enforcement."

The NASD licenses and regulates firms and individuals that sell securities to the public, and can either fine violators or strip them of their right to work in the industry. It is also pressing other cases on the industry, including requiring some 450 firms to reimburse customers for discounts they were supposed to get when they bought large numbers of mutual fund shares.

SEC officials have said they are looking "at the activities and practices of dozens of firms" in both the mutual fund and securities industries. A preliminary analysis by the agency found that half the 88 largest mutual fund firms it recently surveyed "appear to have one or more arrangements" allowing investors to market-time their funds, while 10 percent of the companies disclosed situations to the SEC "that possibly involved late trading," the SEC's Cutler said in congressional testimony last week.

Late trading, which is illegal, gets investors the same-day price for a mutual fund they buy after the 4 p.m. cutoff for orders at that price. Market timing involves the repeated trading in and out a fund to take advantage of price inefficiencies, such as time-zone differences involving foreign stocks. While not illegal, mutual fund companies say they strongly discourage market timing because the rapid trading hurts performance.

In either circumstance, federal and state regulators are investigating whether companies defrauded investors by giving preferential treatment to a select group of traders.

The scandals cost the former CEO of Putnam Investments, Lawrence J. Lasser, his job after the Boston firm was charged with fraud by Massachusetts regulators and the SEC for allowing money managers to market-time funds they directly supervised. A second mutual fund chief, Richard Strong, is under investigation for trades he made in funds of his company, Strong Capital Management.

In the NASD investigations, Glauber said, the NASD will "go right up the line" to determine complicity by top executives of targeted firms, noting that the agency fined Morgan Stanley $2 million in September for conducting prohibited sales contests to encourage its brokers and managers to push the firm's funds over others. In the Prudential case, attorneys for the accused brokers and managers have said their trading activity was either approved or encouraged by top managers. Prudential has declined to directly comment on the allegations.

The NASD's CEO since 2000, Glauber is a financial industry heavyweight with strong Boston ties. He taught at Harvard Business School for more than two decades, and ironically had as students Putnam's Lasser; his successor, Charles "Ed" Haldeman; and Richard Grasso, who recently resigned as head of the New York Stock Exchange after details of his pay package became public. He was formerly an undersecretary of the Treasury in the George H.W. Bush administration and still maintains a home in Brookline.

Andrew Caffrey can be reached at caffrey@globe.com.