AG Spitzer Eyes Morningstar As Probe of Financial Industry Expands

By Kathy Bergen
Chicago Tribune Staff Reporter
December 16, 2004

Chicago-based Morningstar Inc., which grew to become the industry bible for independent research on mutual funds, said Wednesday that New York Atty. Gen. Eliot Spitzer has subpoenaed one of its units, seeking information on how it is compensated for consulting to retirement plans.

As part of a widening array of investigations into the financial industry stretching to companies far beyond New York, Spitzer on Monday subpoenaed information on Morningstar Associates LLC, an investment adviser and a wholly owned subsidiary of the research firm.

The probe appears to be aimed at determining how Morningstar Associates is paid for the consulting work it does for retirement plans.

Morningstar will help design 401(k) retirement plans, for instance, recommending lineups of mutual funds that it believes would be appropriate investment choices for a particular company's employee base.

In an interview Wednesday, Joe Mansueto, chairman and chief executive of Morningstar, said that Spitzer's office may be trying to determine if the subsidiary received any compensation from the mutual fund companies that it recommends for inclusion in 401(k) retirement plans.

Mansueto said the company has done nothing wrong.

"We receive no incentives or fees that would cause us to favor one fund over another," he said of the firm he founded 20 years ago.

The only compensation comes from the company that's setting up the retirement plan, he added.

"We feel very good about the services we provide, and we always operate our business with integrity and in an honest and ethical way."

Published reports indicate Spitzer's office may be looking at retirement plan consultants who host conferences and then charge fund companies high fees to sponsor the gatherings, Mansueto said.

In some of these instances, "if the companies don't sponsor, they might not be on preferred lists," Mansueto said.

At Morningstar, he said, "we don't do that."

The inquiry into Morningstar follows separate Spitzer examinations in recent months at other Chicago-area companies, including insurance brokers Aon Corp. and Arthur J. Gallagher & Co.

And Spitzer's subpoena Wednesday comes less than three months after the research firm--used by 3 million investors--disclosed that the Securities and Exchange Commission is investigating the company for publishing incorrect performance data for a mutual fund.

"We will cooperate fully ... and work diligently to provide [Spitzer's] staff with information that will assist them with their investigation," Mansueto said Wednesday.

Spitzer's office could not be reached for comment.

For months, regulators have been looking at whether consultants in the industry receive enticements for recommending various investment plans or services.

Started in 1984 by Mansueto from his two-bedroom Lincoln Park apartment, Morningstar has grown into a trusted source of research on a wide array of investment vehicles, from stocks and mutual funds to variable annuities and 529 college-savings plans.

With operations in 16 countries, the company tracks more than 100,000 investment offerings.

It is perhaps best known for its use of a "five-star" rating system on mutual funds.

The scrutiny by both agencies could throw a wrench into the company's plans, announced last May, to begin trading shares through an initial public offering of up to $100 million.

"It definitely scares investors off," said Tom Taulli, co-founder of

"The last thing an investor wants to hear is that Eliot Spitzer just issued a subpoena.

"Unfortunately, this is a situation where you're perceived as guilty until proven innocent when you're under scrutiny," he added.

In a case of poor timing for Morningstar, the IPO market is hot right now, he said.

"This is a great company, it has great numbers, great brands," he said. "It's a company that should do well in the IPO market."

Another observer said the probes are not an absolute bar to heading into the public market, but they would affect the share price than could be obtained.

"Could they go public? Yes," said investment industry veteran A. Michael Lipper.

"Could they get the maximum price with these two things overhanging? Probably not."

The SEC is looking into the publishing of overstated returns for the Rock Canyon Top Flight Fund from March 12 to March 23.

Morningstar said the regulator may be concerned about how long it took to correct the information.

"We are still in discussions with the SEC," Mansueto said Wednesday.

Copyright 2004, Chicago Tribune


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