UC Irvine

This paper examines conditions and structures that led to abuses in the American mutual fund industry. The scandals unfolded in 2003 when a whistleblower alerted authorities to illegal and unethical trading practices between institutional investors and mutual fund companies. The abuses included late trading, market timing, illegal sales practices, and excessive fees, with damages estimated at well over US $4 billion per year. While this scandal involved American companies, there are indications that other countries could be at risk of similar wrongdoing. Archival data are used to understand the regulatory conditions that allowed for illegal practices to proliferate throughout the American mutual fund industry. These conditions are compared to those in Japan to assess the potential for similar abuses and how they might best be prevented.