SEC Investigation
The SEC is charged with the regulation of the mutual fund industry in the United States. Following the announcement of Spitzer's complaint, the SEC launched its own investigation of the matter which revealed the practice of "front running". The SEC claimed that certain mutual fund companies alerted favored customers or partners when one or more of a company's funds planned to buy or sell a large stock position. The partner was then in a position to trade shares of the stock in advance of the fund's trading. Since mutual funds tend to hold large positions in specific stocks, any large selling or buying by the fund often impacts the value of the stock, from which the partner could stand to benefit. According to the SEC, the practice of front-running may constitute insider trading.
By early November, investigations led to the resignation of the chairmen of Strong Mutual Funds and Putnam Investments, both major mutual fund companies. In the case of Strong, the chairman Richard Strong was charged with market-timing trading involving his own company's funds. In December, Invesco (market-timing) and Prudential Securities (widespread late trading) were added to the list of implicated fund companies.
Read more about this topic: 2003 Mutual Fund Scandal