| 05 November 2009

We don't normally write about mutual funds, but first the Supreme Court case on mutual fund fees and now this? It's too good to pass up. Isolated incident? Maybe. But we take any chance we can to shine a light on the dark hole that is the mutual fund industry.

Value Line, aka "The Most Trusted Name in Investment Research," has a lot of work to do to earn back that trust. Since 1986 the firm has been skimming commissions off brokers who sell the Value Line funds. The SEC (finally) caught up with the scheme and slapped the firm with fines and restitution of more than $43 million.

The funds were created and sold by third-party brokers and Value Line acted as an investment adviser to the funds. When some of the brokers charged a discount for clearing and settling, Value Line pocketed the difference rather than pass those savings along the the funds. They even had a name for this plan: The "Commission Recapture Program." (Tip for you: when you do something illegal, don't name it.)

The two executives named in the SEC's suit were fired... I mean resigned. Jean Bernhard Buttner was CEO, Chairman, President, and a Director, and David Henigson was a Vice President and Director of the Company.

Value Line got its start in 1931 creating independent research reports and investment newsletters. Before computers, before the Internet, before Quotrons, there were Value Line reports. They would be delivered to brokerage offices in large, bound volumes and poured over by brokers and analysts as the go-to source for investing information. "I don't know any other system that's as good," Warren Buffet once said about the Value Line report.

For many years the company competed with McGraw-Hill's (MHP) S&P unit and over time a new competitor, Morningstar (MORN) began to steal the show with better design, a simpler ranking approach and a focus on mutual funds that appealed to the average investor. Deciding to make an end-run around both organizations, Value Line licensed its name to create a series of mutual funds, 14 of which still exist today.

In the firms latest quarterly report they reported $9.3 million in revenue from periodicals and publications and $4.7 million in fees from investment management services (a 42% drop over 2008 figures).

By comparison, in 2003 the company reported $13.4 million in periodical sales and $7.8 million in investment management fees.