ENRON, Worldcom, even “star” analysts who pumped up the value of technology stocks — all have been the subject of investigations by the US authorities in the past couple of years. But the latest financial scandal to break out on Wall Street could put those in the shade, in scale and reach.

Eliot Spitzer, the New York lawyer who successfully campaigned for reform of investment banks after the dot-com bubble, is now focusing on the $7,000 billion mutual fund industry. His investigation has so far uncovered widespread abuse and already claimed the head of one mutual fund chief.

This inquiry may be on the other side of the Atlantic, but its repercussions are being felt in the UK. The Financial Services Authority (FSA), the investment watchdog, is so concerned that it has contacted unit trust companies — the British equivalent of mutual funds — to gauge whether savers here have been left out of pocket by similar malpractices.

At the heart of Mr Spitzer’s investigation are the business practices of a group of hedge funds, the murky and largely unregulated investment vehicles that seek to deliver real returns for their wealthy clients, whether markets rise or fall. The main allegation is that hedge funds conspired with the mutual fund industry in a way that disadvantaged the 50 million or so families with savings tied up in mutuals.

There are two key charges. The first is that hedge funds have been allowed to trade in the shares of mutual funds “after hours” — when trading is closed to ordinary investors. Mutual funds, like unit trusts, are priced once a day. This creates a window in inter- national funds, when “mis- pricing” can occur. Hedge funds like nothing better than a pricing anomaly.

Permitting outsiders such as hedge funds to trade after hours is illegal in the US. The second charge, known as market-timing strategy, is legal, although widely regarded as unethical. The principle is the same — the ploy hinges on the exploitation of the pricing of a mutual fund that invests in markets that open later — but does involve some risk on the part of the hedge fund. Again, hedge funds are looking for mispricings, though they must buy and sell shares in mutuals during regular trading hours.

To ensure this ruse works, hedge funds must move millions of dollars in and out of funds regularly. Not every mutual fund company is willing to do this, because it involves costs that have to be shared out among other investors. To sweeten the pill, hedge funds offered the mutual funds fees — which many accepted.

If you think this is unlikely to happen in the UK, then think again. The FSA has dispatched questionnaires to more than 40 of the country’s biggest unit trust groups, asking them to detail their contacts with hedge funds. And the danger does not lie so much with hedge funds based in the City, but those in the US. Not content with their pillage of the mutual fund industry, they have also sought to pull the same trick here, particularly through market-timing.

Chiefs of unit trust houses say the hedge funds are extremely cunning in the way they approach companies. They usually target international funds, feeling that a Japanese trust would be too obvious. Then they hedge against movements in other international stocks so that they concentrate on exploiting the time difference with Tokyo.

Unit trusts that are reluctant to play along are often offered extra fees to accept large inflows and outflows from hedge funds. An extra fee drops straight into the pockets of the company, rather than the fund. Hedge funds also seek to smooth the path by working within the unit trust’s cash limits, so that the manager does not have to create and cancel units, which is expensive.

Some hedge funds have insinuated their way into British unit trusts by creeping under the radar. Until the FSA completes its inquiry, we will not know the extent of any abuse. In the US, however, it is clear that some of the biggest names in mutuals — Putnam and Vanguard included — have been unable to resist the fees.

How costly will this scandal be? It is difficult to tell, though some say that the mutual fund industry will have to pay billions of dollars in compensation. The abuse is much like the classic bank account fraud: take a penny from everyone’s account and no one notices, but the cumulative sum is millions. And like bank fraud, this is not a victimless crime.

Richard Miles this week received the award for excellence in National Financial Journalism by the Investment Management Association. This is just the latest award for Times Money, which has been named National Broadsheet of the Year in the prestigious Bradford & Bingley awards.