John Bogle, Vanguard Group Founder

This is a partial transcript from Your World with Neil Cavuto, September 5, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: For mutual fund companies, it was really not a good week. New York Attorney General Eliot Spitzer is breathing down their financial backs, saying that they played fast and loose with the rules, allowing favored clients to score trading deals typical folks could only dream of getting.

Now, if true, it’s a huge industry black eye and one, mutual fund legend John Bogle, says it can ill afford now.

John joins us now from Vanguard Fund headquarters in Philadelphia, Pennsylvania.

John, how bad is this?

JOHN BOGLE, VANGUARD GROUP FOUNDER: Neil, it’s terrible. There are two aspects to the Spitzer complaint. And, by the way, he deserves some sort of a hero’s medal for what he’s doing to help mutual fund shareholders.

But one aspect is trading after the final price for the previous day has been determined, say, three, four, five hours. when you’ve got a much better idea of what will happen the next day, and that’s something I cannot imagine anybody in this industry with even a hint of ethics or integrity would do, and, in fact, it’s illegal.

The other practice is a kind of a more interesting, and that’s playing timing games usually with international funds where, because of different times in Europe and Japan, you can kind of speculate against the U.S. closing price at 4:00 U.S. time.

That’s been going on for a decade. Everybody knew about it. It’s been catalogued by professors and financial analyst journals, and why it took all this to finally pin the tail on the donkey, if you will, I don’t know. But it will be a good thing to have that tamed down, too.

CAVUTO: Gee, I don’t know how I missed out on this, John. It seems so easy to just take money like this, and yet so many apparently were. What does this mean to the mutual fund industry? As you know, you really started this whole wave. Is it going to affect people investing in funds?

BOGLE: Well, of course, it’s going to affect people investing in funds because they have had a breach of trust. It’s not a serious financial breach of trust to them because this is one of these cases where, if you focus a nice $30-million or $40-million or $50-million or $100- million advantage on a particular owner of the fund, say the hedge fund owners here, each mutual fund shareholder may lose something like, let me say, a hundredth of a cent a share. It’s almost invisible if the fund is big enough. Stealing a little bit of money is still stealing, Neil. So we have a breach of trust by...

CAVUTO: I know Vanguard’s been subpoenaed, right? No allegations of impropriety.

BOGLE: We have been subpoenaed for information down here.

CAVUTO: OK. So what does that mean?

BOGLE: Well, I mean that means they want to look at our books and make sure we haven’t been part of this, which I’m highly confident we have not been part of, and I can’t imagine this company that was built on principles of integrity is going to depart very far, whether I’m still here or not, from those basic principles.

CAVUTO: But, John, here’s what I want to get clear. Now the settlement that Spitzer came up with -- maybe it will be a $40-million, $50-million pool. I don’t know who gets that, but I do know the potential abuse here goes into the billions of dollars. So I’m looking at that math, and I’m saying something’s not right.

BOGLE: Well, something is not right, you know, and the firms involved here are probably managers of pretty close to a trillion dollars.

CAVUTO: So punish them more. This seems like chump change punishment.

BOGLE: I think they will be getting after the funds in a much heavier way. This settlement was only with the so-called singing canary hedge fund, apparently, had a tipster there, and the real thing that I think is important here, though, is mutual funds have had a big problem for a long, long time in putting the interests of their fund shareholders ahead of the interests of their management companies. They have not done that, Neil, in my opinion.

So this big scandal is going to push away all that nibbling at the edges that would have gone on for a lot more years. So this is a blessing in disguise for mutual fund shareholders.

CAVUTO: John, can’t thank you enough. Appreciate you coming on to put it in perspective.

John Bogle.

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