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Rating agency calls for consequences after financial scandal

NAfter the scandal over possible insider trading at the fund company Union Investment, the rating house Morningstar is calling for stricter controls on fund managers. “The fund manager has apparently completely lost its moral compass,” said Morningstar analyst Ali Masarwah in an interview with F.A.Z. “The fund company must now plausibly demonstrate that it could not have done more to prevent such unlawful private transactions.”

As reported, Union Investment released one of its fund managers after allegedly having unlawfully enriched himself considerably over the course of months. To this end, he is said to have used his insider knowledge about the upcoming trading of the fund company by doing private securities transactions beforehand – “front running” is what it means in technical jargon. According to reports, he is one of the most prominent managers of the fund company of the Volks- und Raiffeisenbanken, who headed one of the most important funds there, worth several billion euros. “In terms of responsibility and the level of earnings, the fund company has to ask itself whether it wants to rely on voluntary reports of private share transactions or whether it cannot, for example, request submission of the tax return,” Masarwah continued.

Nine million euros in your own pocket

It is common in the industry that employees have to report to their employer at which banks they have private custody accounts and which securities transactions they use to process them. Since fund managers regularly hold background discussions with companies and are aware of upcoming major orders from their fund company, this is to ensure that they do not use their knowledge for private gain. The now released employee of Union Investment is said to have made a profit of nine million euros with his insider trading, according to the public prosecutor. He faces up to 15 years in prison.

The financial supervisory authority Bafin also initially sees Union Investment as obliged to prevent its employees from insider trading. “Every fund company must have appropriate internal regulations for the monitoring of private securities transactions of its employees,” said a spokeswoman at the request of the F.A.Z. Regarding the specific case, she says: “We have received several reports of suspicion from notifiable institutes, which we investigated with regard to insider trading.”

Image damage for the entire industry

Even if Union Investment assures that customers and funds have not been harmed by the insider trading according to the current state of knowledge, Morningstar analyst Masarwah sees the incident as causing considerable damage to the image of the German fund industry. “The small investor gets stuck: Wirecard was a criminal, the fund managers are criminals,” says Masarwah. “This is another blow to the already weak stock culture in Germany.”

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