“The investigation rocking the mutual-fund industry began with a phone call in June by a 20-year Wall Street veteran that lasted 10 minutes,” writes Henny Sender in today’s Wall Street Journal.

“Noreen Harrington, calling from her apartment near New York’s financial district, asked to be connected to a lawyer in the office of New York Attorney General Eliot Spitzer. Several times she got voice mail and didn’t leave a number, she says. But one day, an assistant attorney general picked up.”

“Without identifying herself, Ms. Harrington, 47 years old, told the junior attorney something unusual about her former boss, Edward J. Stern — who ran a fund for wealthy investors and whose family controls a $3 billion business empire. Mr. Stern, she said, had bought and sold mutual funds after the 4 p.m. close of trading — but still got the 4 p.m. prices, letting him take advantage of late, market-moving news.”

“Ms. Harrington’s call set off a chain reaction, leading to two other informants, who helped Mr. Spitzer and his team open a far-reaching probe of the $7 trillion mutual-fund industry. At least 25 financial firms so far have been enmeshed in it. Two traders have pleaded guilty and are awaiting sentencing.”

“The identity of the tipsters has been a closely guarded secret on Wall Street. Each worked for the Stern investment business at one time, though each appears to have had a different motivation for talking to investigators. The second informant, James Nesfield, 45, was a consultant to Canary Capital, Mr. Stern’s trading unit. Mr. Nesfield, who now lives on the North Carolina Outer Banks, where he sometimes helps man fishing boats, says that after being contacted by investigators, he spoke to them out of remorse and fear of prosecution. Andrew Goodwin, 33, was a former Canary trader who had worked by Mr. Stern’s side and, according to others, believed his future was at risk if he didn’t cooperate.”

“Ms. Harrington’s hesitant call was well-timed. Just a few weeks earlier, Mr. Spitzer had hired David Brown, a 45-year-old Wall Street lawyer, to work in the Investor Protection Bureau. Mr. Brown already was concerned about mutual funds. In a job interview with Mr. Spitzer, Mr. Brown says, he was asked where the next scandal would come from. Recalling a 2001 article from a University of Iowa legal journal about conflicts on mutual-fund boards, he shot back: ‘Mutual funds.’ “

“Quarterbacking a team of 15 lawyers, Mr. Brown began digging up information to see if Ms. Harrington’s tip would bear out. The first hint that it might: an obscure chat room, MutualFundsnet.com. Mr. Stern last year posted a response on the site to someone offering investors the opportunity to buy and sell shares of mutual funds after the 4 p.m. close of trading.”

“Mr. Brown was dubious that mutual funds would let anyone do that. He walked upstairs to Mr. Spitzer’s office. ‘This can’t really be happening,’ he recalls saying to his boss. ‘They can’t be doing this out in the open, right?’ Mr. Spitzer encouraged him to keep working on it. ‘Keep pounding,’ the attorney general called out as Mr. Brown turned to leave, according to people familiar with the matter. As the trail grew warmer, Mr. Spitzer encouraged Mr. Brown even more, saying, ‘I smell indictments.’ “

“The tipsters helped expose the two improprieties in the mutual-fund scandal: late trading and active, in-and-out trading of fund shares, often called ‘market timing.’ What made mutual funds a target is that they are priced only once a day, at a specific time, unlike stocks. That feature provided opportunities for privileged traders who knew how to game the system.”