Tuesday, June 14, 2011

The Supreme Court Invalidates Moral Hazard

It just keeps getting better and better and better here in America.  Especially if you're an investment banker or mutual fund manager.  In another in an endless series of 5 - 4 decisions, the high court ruled by a vote of... wait for it... wait for it... 5 - 4 that mutual funds are not responsible for the actions of their fund managers or their subsidiary funds that later turn out to be fraudulent or otherwise rigged.
The high court agreed [that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable]. It ruled the alleged false statements in the prospectuses were made by an investment fund, not Janus Capital, and that Janus and the subsidiary therefore cannot be held liable in a private securities fraud lawsuit.

The lawsuit was brought on behalf of those who bought Janus stock from mid-2000 through early September 2003.

It alleged that the prospectuses of several Janus funds created the false or misleading impression that the company would adopt measures to curb market timing -- when in fact secret arrangements with several hedge funds permitted such transactions, to the detriment of long-term investors.

"What this ruling says is that as long as there are separate legal entities, even if management totally dominates all aspects, there's no liability," Birdthistle said. "This is going to open the eyes of those not in the funds industry who are going to say: 'Wow, those guys are bulletproof'," he said.
Keep in mind that, as an investor, you're paying Janus to look out for your interests.  Unless someone is paying them more not to, apparently.

Invest wisely, my friends, if you can... because the Supreme Court no longer believes in the moral hazard.

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