Deutsche faces probe in fund scandal

THE widening US mutual fund scandal reached the doors of a European company yesterday when New York attorney Eliot Spitzer began investigating Deutsche Bank.

He has asked for documentation on the bank's trading practices in the US.

Funds caught up in the investigation have seen heavy withdrawals by investors.

Deutsche Bank has significant investment management operations in the US after acquiring Scudder Investments and joining in a co-operative agreement with Invesco Funds.

The German bank is only the latest to be drawn into an investigation that is spinning wider with each passing day, and with deepening consequences for the US investment fund industry.

Phil Angeledes, the California state treasurer, yesterday advised state pension funds, including CalPERS - the largest fund in the US - to withdraw their money from Putnam Investments, which has been charged by regulators in relation to the mutual fund probe. The funds vote next week on what action to take, but several other state funds, including Massachusetts and Vermont have already withdrawn their money. Seven former employees of Prudential Securities were charged yesterday by the Securities and Exchange Commission and Massachusetts state regulators with violating securities laws.

They are alleged to have conducted thousands of market timing trades - dealing rapidly in and out of fund shares - using false names and identities, but the brokers claim they have broken no laws. Market timing, although discouraged by many mutual funds, is not illegal.

Stephen Cutler, head of enforcement at the SEC, has told a Senate committee that he had uncovered a new form of misdemeanour: mutual funds using suspect valuation methods to calculate-their net asset value. He said the SEC was examining at least two instances.

Meanwhile, Spitzer is threatening legal action against Security Trust, a company that administers retirement funds. He has also warned that many more companies and individuals involved in managing or broking mutual funds are likely to feel the regulator's lash in the next few weeks.

It looks increasingly likely that many brokers and hedge funds will be targeted. Brokers appear to have been facilitating suspect trades for selected clients. Hedge funds may have been involved in market timing and late trading (buying or selling fund shares after 4pm, which is illegal).