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What’s bad for mutual fund companies may be good for lawyers’ business. Securities lawyers say the number of mutual funds under investigation is growing so fast that they are overwhelmed with calls for advice or requests to represent clients. “There never has been a situation where such an unprecedented number of regulators are throwing this many resources” at a securities problem, said a Washington attorney who asked not to be named but who represents three mutual fund companies under investigation. This attorney and others said their firms were swamped with requests for help. “This is the new wave of market regulatory issues and we are very busy,” said securities lawyer Beth I.Z. Boland, a partner at Bingham McCutchen in Boston. “It started with Eliot Spitzer’s initial salvo, then came a flurry of enforcement actions, followed by shareholder lawsuits.” Spitzer is the New York attorney general. Boland represents Prudential Securities, now part of Wachovia Corp., which has six former employees facing civil charges in Boston for improper trading. She declined to comment on the case. Wachovia/Prudential has not been cited, but the company still faces regulators’ questions concerning whether it condoned the trading, or should have had tighter controls in place to avoid it. Pete Michaels, a partner and securities attorney at Boston-based Murphy & Michaels, represents Wachovia/Prudential in Massachusetts. “In my 15 years in this business I have not seen a time when so many regulators were involved in any one case at the same time,” Michaels said, adding that he has been dealing with the U.S. Securities and Exchange Commission (SEC), the Massachusetts Securities Division, the state attorneys general for Massachusetts and New York and the National Association of Securities Dealers, among others. The mutual fund snowball began in September when Spitzer in New York filed a 44-page complaint alleging that several mutual fund firms allowed a hedge fund called Canary Capital Partners to book millions of dollars in profits through improper timing of trades. Improper market timing includes the frequent trading of shares to take advantage of pricing inefficiencies and “late trading”-placing orders after the 4 p.m. market closing time. Defense attorney Gary P. Naftalis, a partner and co-chairman of the New York firm of Kramer Levin Naftalis & Frankel, represents Canary and its principal manager, Edward Stern. Naftalis declined general comment on the case, but did note that his client chose to settle the state case quickly, paying $30 million in restitution and $10 million in penalties. The company still must deal with shareholder suits, he added. Such settlements do not sit well with defense attorneys like William Nortman, a shareholder in Akerman Senterfitt’s Fort Lauderdale, Fla., office. Nortman represents two former employees of Kaplan & Co., a Boca Raton, Fla., firm named in Spitzer’s complaint as having worked with Canary on improper trades. “Spitzer is taking a hard-line view on timed trading, something that was a widely accepted practice,” Nortman said. “But the companies will resolve it by settling because the stakes are so high. They can’t chance losing their licenses.” That leaves individual employees, like Nortman’s clients, struggling to prove their innocence. Not black and white Calling the rules on trades “elastic,” Nortman said the timing of trades is “not a black-and-white issue and the regulators’ interest in it is “but another culmination of the Enron-WorldCom-Tyco psychosis streaking through the regulatory world. It is regulation by adjudication.” Spitzer’s office declined comment. But several other firms named in his complaint as having traded with Canary, including Janus Capital Group Inc. last week, have said they are negotiating with Spitzer’s office in an effort to avoid charges. Others, like Alliance Capital Management Holding, also have announced resignations of top executives overseeing mutual fund operations. So far, regulators have charged only one company, Boston’s Putnam Investments, part of Marsh & McLennan Cos., with securities fraud. The SEC and the Massachusetts Securities Division on Oct. 28 accused Putnam of self-dealing by two managing directors and other employees. Regulators identified four attorneys at Skadden, Arps, Meagher & Flom of New York as representing Putnam. They are Matthew J. Mallow, head of the firm’s corporate finance group in New York; Colleen P. Mahoney, who heads the firm’s securities enforcement and compliance practice in Washington; Richard T. Prins, co-head of the investment management group in New York; and James R. Carroll, a partner in the Boston office with experience in securities class action defense. The lawyers either did not return phone calls or declined to comment for this story. In an earlier statement, Putnam has said it did not act fraudulently and did not benefit financially from improperly timed trades. It has promised restitution to investors and is cooperating with regulators. Putnam CEO Lawrence J. Lasser resigned over the scandal, and the two managing directors face fraud charges. Putnam announced it has hired Barry P. Barbash, a partner in the Washington office of New York-based Shearman & Sterling and a former director of the SEC’s investment management division, to review company policies. Another company named in Spitzer’s complaint is Strong Capital Management, which oversees Strong Mutual Funds. David Boch, a partner at Bingham McCutchen, is defending the Strong funds. Bruce E. Clark, a partner at New York’s Sullivan & Cromwell, represents Strong Capital Management. Both lawyers declined to comment, as did the company. Richard Strong, founder of the Strong companies, is represented by Stanley Arkin of New York’s Arkin Kaplan & Cohen. The Wisconsin-based parent company has promised restitution to investors, and has hired former SEC Chairman David Ruder, now a law professor at Northwestern University, to review Strong’s procedures. The state of Wisconsin has hired its own lawyer to audit the Strong funds independently. Douglas M. Hagerman, a partner in the Chicago office of Foley & Lardner, said the state has a $1 billion college savings plan managed by Strong. “My client is Strong’s largest customer,” Hagerman said. “I want to make sure that none of the financial consequences of the scandal fall on the investor, and that [Strong's] mutual fund program cleans up its act.” Hagerman said he would be scrutinizing new corporate governance and compliance measures promised by Strong. “The details matter,” he said. Most securities attorneys agree that the mutual funds scandal has only just begun. In testimony earlier this month before Congress, Stephen M. Cutler, director of the SEC’s enforcement division, said his staff is investigating dozens of firms and analyzing information obtained from 88 mutual funds. One defense attorney said that dealing with the investigative subpoenas alone is keeping many law firms busy. The SEC also has expanded its inquiry beyond market timing to include three other areas: the incentives paid to brokers that could create a conflict of interest; the cost to investors of buying different classes of mutual fund shares; and the abuse of “breakpoints,” which are discounts available at specified large investment levels. Most securities attorneys also believe that the scandal will lead to new corporate governance rules. Congress is considering at least two bills that would impose tighter standards on mutual funds, and Cutler told Congress that the SEC is considering new mutual fund rules of its own.

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