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Mutual Funds Enough of a Gamble, Without Gambling...

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New York, NYInvesting in mutual funds is enough of a gamble in itself, without the added stress of wondering just what kind of illegal activity your fund is investing in. And yet, even beyond the horrors of the current bear market are mutual fund losses exacerbated by illegal activity--and mutual fund ERISA comes into play.

Investment GamblingEven the most casual investor will be aware that the engine behind mutual funds, is the investiture of the fund into other companies that are thought to provide a quality return on investment (ROI). Thus, the fund grows on the backs of the various companies, and other entities the fund is invested into.

More often than not fund managers get it right, by making wise investing choices on behalf of the mutual fund investors they represent and are pledged to serve under ERISA guidelines.

But sometimes they get it wrong by investing in companies with poor track records, or poor performance. Or they may make an investment for all the wrong reasons, with the financial and fiduciary interests of their clients furthest from their minds.

And sometimes, they'll invest in companies involved in illegal activity—such as gambling—all in an effort to make a buck.

How can a funds manager, who has to look himself in the mirror each day, gamble on betting his fund's assets on illegal activity, you might ask? Truth of the matter is, many of these entities conducting illegal activity, including online gambling, do very well indeed. If you're a funds manager looking for stellar fund performance and with an eye to impressing investors, forgive the temporary parking of moral fortitude in deference to growing the pot.

But let's remember, now. This activity is illegal. And if the entity conducting the illegal activity goes down, then the mutual fund and the investors go down with it.

In other words, it's enough of a gamble to expose your money to the ebb and flow of the markets (and no one needs to remind you just where those markets are ebbing right now…), without exposing your hard-earned portfolio to potential losses through an investment by your fund in illegal activity.

But it DOES happen, and a handful of lawsuits are testament to that possibility. One case in particular involves the Vanguard Group, which is alleged to have invested client assets in companies undertaking Internet gambling enterprises—an activity that is banned in the US.

A complaint was filed this past summer in US District Court New York against Vanguard's chief investment officer George Sauter and portfolio manager Duane Kelly, together with 8 trustees of the company. The allegation is that Vanguard violated US racketeering laws and breached their fiduciary duties to investors.

According to the complaint, the "defendants caused the funds to become owners of illegal gambling businesses."

Compare that to the lofty ideals of 'socially-responsible mutual funds.' There are plenty out there—and not only do they eschew investing in anything that even hints at being illegal or unlawful, the funds also maintain a sound moral code.

Broadly defined, socially responsible investing is the practice of integrating values-based criteria into the investment process. Let's say you're a non-drinker, and would appreciate investing in a fund that does not invest in alcohol. You'll find one in the Noah Fund, which does not invest in companies involved in alcohol, tobacco or gambling. The Women's Equity Fund invests in companies that have maintained fair treatment of women and minorities in their hiring and promotion protocols, and their fair portrayal in advertising.

While these funds, like any other fund, will rise and fall according to the machinations of the market and individual company performance, there is no risk of a fund being harmed, or assets threatened by any misguided investment in a company involved in illegal, or blatantly fraudulent activity.

Ironically Vanguard—the company now embroiled in a lawsuit with regard to investing in online gambling—was identified in an undated report as having introduced a socially responsible fund.

Vanguard is the second-largest US player in the stock, and mutual fund markets.

It is enough to have seen your portfolio sag under the weight of an unprecedented bear market. However, if your mutual fund losses have been made worse by questionable mutual fund investing practices, you could be considered for a mutual fund ERISA claim through a qualified attorney.


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