The Wall Street Journal reports today that twenty-seven mutual fund companies will be the focus of a new SEC investigation seeking to find out if they accepted millions of dollars in kickbacks from their service companies. This new probe was started after Bisys Group, which provides administrative services to numerous mutual fund companies, settled its kickback case with the SEC. In that case, the SEC said that Bisys paid a total of $230 million in kickbacks between July 1999 and June 2004 to win contracts from mutual funds for its services.

"Receiving a kickback that comes indirectly out of the pockets of shareholders is the functional equivalent of embezzlement," Mercer Bullard, a law professor at the University of Mississippi told the Wall Street Journal. Bullard is the founder and president of Fund Democracy and champion for mutual fund shareholders everywhere. He's led the charge for years to make mutual fund board members more independent, which is the only way scandals like this one can be prevented. In fact according to the Wall Street Journal story today the kickbacks were arranged in side agreements and were hid from mutual fund investors and independent board members.

The Journal story talks about "Advisor A" who allegedly demanded millions of dollars from Bisys in return for a recommendation to the mutual fund board members that the Bisys contract should be renewed. The SEC claims in its complaint the money was used primarily to pay "Advisor A's" marketing costs, but also some of it went to pay for the initiation fee and monthly dues at a country club.

Most of the major mutual fund companies won't be pulled into this scandal because they tend to have their own in-house units to carry out administrative functions. The twenty-seven mutual funds involved in this scandal will primarily be small mutual fund companies, but some banks are expected to get caught up in this probe as well.