That favoritism exists on Wall Street hardly seems revelatory. After all, any dog or cat can distinguish between those likely to pet them and those more apt to ignore them. Or worse.

The news media has concentrated on two pernicious tricks of the "trade," late trading and market trading. Late trading occurs after the store has officially closed its doors, and it allows the privileged merchant to buy or sell on good or bad news that breaks in the evening. Of course, this elitist group does not include the average Joe or Jane.
Market trading takes place when mutual funds set the price only once per day. The advantaged few observe the stock markets, in which trades occur more or less continually throughout the day. They can then buy or sell mutual funds once they detect the direction in which the wind is blowing. Again, small investors get the shaft.

Some professionals estimate that mutual fund investors have lost 5-10 percent of their real return to those engaging in late trades and market trades. Whatever the actual amount, clearly the little guy cannot trust mutual funds anymore.

Except for Eliot Spitzer, it isn’t obvious that we should turn to anybody in government for help. The SEC has been slow to act against these thieves. Perhaps the agency remains melancholy after its bout with Harvey Pitt while trying to survive on a shoestring budget. Perhaps things will turn around some day, but they haven’t yet. No, I wouldn’t trust my money with those guys.

Nor would I hope that Congress would join the parade. Members gave us the Sarbanes-Oxley Act, which increased corporate costs while providing little or no benefits. Many people feel that the soon-to-be-issued reports on internal control systems will solve the problems. Wrong! If anybody bothered to examine the record, he or she would learn that the accounting scandals occurred when management overrode the internal control systems. As usual, Congress attacked the wrong problem.

 

I would urge those previously with accounts at Putnam or Alliance Capital Management or Invesco Funds or one of the other reprobate funds to sue the executives at the mutual funds. (I assume they have already liquidated their accounts; if not, they should.) Not that the investors will recover anything -- plaintiffs’ attorneys make sure their fees prevent that. But, it would be nice to extract some real penalties against those jerks, and large jury awards are a step in the right direction. Not quite as good as a public hanging, but a disincentive nonetheless.

 

The most amusing news report focused on Putnam’s new code of ethics. This code now contains a provision that prohibits an employee from market trading. The rule reveals the obvious hiccup in corporate ethics codes—they are meant for public consumption only. Come on, does any reader believe that Putnam really wants to abstain from market trading? What they covet is not getting caught!

 

After all, if Putnam or any other mutual fund really wanted to protect the shareholder, they could have done so. Whatever soothing words flow from the lips of mutual fund managers must be assumed mere rhetoric.

The choice for inexpert investors must be to exit the scene. First with devious corporate managers and inattentive board directors and now with light-fingered mutual funds, the little guy doesn’t stand a chance. Buying stocks at this time equates to a desire for getting robbed.

 

Forget the stock market. My advice today -- donate your money to charity. It’s safer, and you get a tax deduction. You’ll feel better, too.

J. EDWARD KETZ is the MBA Faculty Director at the Smeal College of Business at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle.