“Regulators may be hammering mutual-fund firms implicated in the funds scandal with heavy fines and stringent policies, but it’s fund investors who might leave some outfits scouring the floor looking for their molars,” writes Ian McDonald in Monday’s Wall Street Journal.

“In the six months since the fund-trading scandal first erupted in September, more than $40 billion bled from stock and bond funds managed by Putnam Investments and Janus Capital Group, Inc., according to Boston fund consultant Financial Research Corp. Both firms have figured prominently in regulators’ complaints, though the latter hasn’t been accused of any wrongdoing.”

“During the same period, American Funds and the Vanguard Group, two firms not implicated in the scandal, have topped sales charts, raking more than $85 billion into their stock and bond funds through Feb. 29, according to FRC. While these firms’ funds generally held up better than most in the bear market, their ‘clean’ status is seen as a key driver of their recent sales.”

“Regulators, who say long-term investors’ returns were lowered by market-timing and late-day fund trading, have noticed investors doling out their own punishment. ‘Look at the market reaction to firms caught up in this, and you see they’re paying a heavy price,’ said Paul Roye, director of the SEC’s investment management division, in a recent interview with the Online Journal. ‘There are real lessons being taught.’ “

“Don’t forget, state and federal securities cops have already set fund firms back a whopping $1.65 billion in just four settlements through fines, fee cuts and other damages related to the improper funds-trading scandal. That’s a record, topping the $1.4 billion landmark Wall Street research analyst settlement last year.”

“But institutional and individual investors may have more leverage than regulators in deciding which firms actually pay the highest price for their alleged bad behavior. How so? By yanking their money from firms who’ve allowed improper or illegal trading in their funds in recent years and giving it to those that didn’t. And that’s just what millions of Main Street and institutional investors have done with their billions of dollars. The effects will last much longer than the typical settlement where firms pay a fine and usually don’t even have to admit they did anything wrong.”

“Withdrawals from Putnam, a unit of Marsh & McLennan Cos., and Janus from September through February added up to about 19% and 16% of the assets in their stock and bond funds for individual investors, respectively, at the start of that stretch by FRC’s tally.”

“One salve was 2003’s rising market that boosted fund assets. Janus’s assets under managed only fell from $150 billion when the scandal broke to $147.5 billion at the start of March. But heavy withdrawals by institutional clients, including several pension plans, sent Putnam’s assets tumbling 14% down from $271 billion at the start of September.”