The mutual fund scandal of 2003 was the result of the discovery of both illegal and unethical trading practices on the part of certain hedge fund and mutual fund companies.

On September 3, 2003, New York Attorney General Eliot Spitzer announced the issuance of a complaint against New Jersey hedge fund company Canary Capital Partners LLC, charging that they had engaged in "late trading" in collusion with Bank of America's Nations Funds. Bank of America is charged with permitting Canary to purchase mutual fund shares, after the markets had closed, at the closing price for that day. Spitzer's investigation was initiated after his office received a ten-minute June 2003 phone call from a Wall Street worker alerting them to an instance of the late trading problem.

Late trading is illegal under New York's Martin Act and Securities and Exchange Commission (SEC) regulations due to the unfair advantage the late trader gains over other traders. In the United States, mutual fund prices are set once daily at 4:00 p.m. Eastern time. Late trading occurs when traders are allowed to purchase fund shares after 4:00 p.m. at that day's closing price. Under law, most mutual fund trades received after 4:00 p.m. must be executed at the following day's closing price.

Canary Capital settled the complaint for US$40 million, while neither admitting nor denying guilt in the matter. Bank of America stated that it would compensate its mutual fund shareholders for losses incurred by way of the illegal transactions.

Spitzer also charged that major mutual fund groups Janus, Bank One, and Strong had facilitated "market timing" trading for favored clients. Allowing some clients to market time, while denying that ability to others, is considered unethical. It tends to increase the cost of administering a mutual fund, a cost borne by the rank-and-file fund investors who cannot market time. The firms in question had claimed in their prospectuses that they prohibited market timing. The practice tends to advantage the company's bottom-line and that of its share-holders at the expense of its fund investors. One estimate saw buy-and-hold mutual fund investors loosing US$5 billion per year because of market timing trading. Spitzer's complaint alleged that Canary Capital Partners had engaged in market timing transactions with 30 mutual fund companies.

The SEC is charged with the regulation of the mutual fund industry in the United States. Following the announcement of Spitzer's complaint, the SEC launched its own investigation of the matter which revealed the practice of front-running. The SEC claimed that certain mutual fund companies alerted favored customers or partners when one or more of a company's fund planned to buy or sell a large stock position. The partner was then in a position to trade shares of the stock in advance of the fund's trading. Since mutual funds tend to hold large positions in specific stocks, any large selling or buying by the fund often impacts the value of the stock, from which the partner could stand to benefit. According to the SEC, the practice of front-running may constitute insider trading.