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Literally Paying for an ‘Error”

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Bloomberg News

A trader at Scudder Kemper Investments has left the firm after making trades that resulted in losses for the $1.14 billion Scudder Short-Term Bond Fund--losses the firm says it will cover for its investors.

Scudder said it decided to cover the fund’s losses because that would be “in the best interest of shareholders.” It declined to disclose the size of the losses.

Scudder’s decision is unusual in the mutual fund business. It said the losses resulted from what it called an error in trades in the U.S. Treasury futures market. It would not be more specific.

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It’s “very rare for money managers to reimburse investors who own shares of funds that have fluctuating market prices like Scudder Short-Term Bond Fund,” John Rekenthaler, director of research at fund tracker Morningstar in Chicago, said Monday.

The most publicized case occurred in the summer of 1994, when PaineWebber Group injected about $33 million into its Short-Term U.S. Government Income Fund to cover losses stemming from investments in mortgage-derivative securities.

Reimbursements are more common for money market mutual funds, which have a stable net asset value of $1 a share. Money managers will on occasion cover losses when a money market fund is in danger of falling below $1 a share.

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