If there was an uncontested king of mutual funds on Wall Street, then it was Peter Lynch.

In 1977 he assumed the reins at Magellan Fund, a Fidelity vehicle with $18 million in assets. He left behind a $14-billion fund, by virtue of seriously outperforming the market and his rivals, too.

After retiring from management, Lynch went on the lecture circuit, wrote a best-seller on investments, and continued to advise Fidelity, which thanks to him had become the biggest and best mutual fund management firm in the world, today boasting $1.6 trillion in managed assets.

Lynch, a revered multi-millionaire, hardly needed to indulge in petty graft - specifically, tickets to sports events that he received indirectly from brokers, through which Fidelity bought securities for its clients.

Yet last week a four-year probe by the U.S. Securities and Exchange Commission into mutual fund managers accepting sweeteners from brokers ended, and Lynch had to return $16,000, the value of the tickets he'd accepted. Of course, his embarrassment pales in comparison to that of Client No. 9, a.k.a. Eliot Spitzer, ex-prosecutor and soon-to-be former governor of the State of New York and the terror of Wall Street in the days following the collapse of Enron and WorldCom.

But the Lynch affair is just one facet of a broad investigation by the SEC into Fidelity, the biggest investments firm in the world, which has uncovered practices just as sordid at the heart of America's managing-other-people's-money industry.

The Wall Street Journal, which broke the story two-and-a-half years ago, focused on a wild stag party in Miami, attended by Fidelity mutual fund workers and financed by brokers supplying services to Fidelity: Jeffrey's Group, Cowen, Lazard.

The bash featured private jets, yachts, drugs, prostitutes and a very special kind of entertainment: dwarf-tossing (yes, real dwarves), hired through the Web site shortdwarf.com.

The investigators suspected that the brokers were lavishing goodies - tickets, parties, prostitutes - to sway the Fidelity managers in favor of their merchandise. In other words, that Fidelity would use their services not because of better prices or terms, but because they threw better parties. Fidelity has just agreed to pay an $8-million fine, without admitting any culpability, to avoid criminal prosecution.

Fidelity is a super-brand in the world of investment management. The settlements that it, and Lynch, reached with the SEC were truly low points for the industry. Yet possibly the most painful attack on them originated in The Economist last week, which ran a special segment on a topic dear to TheMarker: how well the funds industry has done in recent years, mainly for itself.

Managers of mutual funds, pension funds and investment portfolios charge too much for their management services and supply too little in the way of returns. The managers grow rich and the clients get mediocre returns in exchange for top dollar.

Coincidentally, Israel had its own little scandal last week, when a young investment manager at an asset management giant, Prisma, did some betting using the money of the Hermon provident fund, violating the company's investment policy, and came a cropper.

He lost 8% of the fund's assets inside a month. A probe by investigator Yossi Bahir, appointed at the urging of capital markets commissioner Yadin Antebi, exposed a long list of bad practices at Prisma, and depicted some of its work as slipshod and irresponsible.

Naturally, opponents of the Bachar reform, which forced the banks to sell their provident and mutual funds, chortled at Prisma's fiasco, but in fact the problems had nothing to do with the reform. Capital market novices may not realize it, but the problems at Prisma are child's play compared with the vast extent of corruption and theft of client money that had been the norm in the mutual fund and savings industry 15 and more years ago, during the era of rule by the banks. The rot was so obvious that in 1994, we ran an article on the banks' thieving called, "La Cosa Nostro - Guide to Corruption at the Banks."

"Nostro" is Italian for "ours" and it also refers to the banks' own portfolios. They'd buy a stock for their own portfolio, then hit the market and aggressively buy it for client portfolios, driving up its price, to create profit in their "nostro" portfolio. But in 1994 the Israel Securities Authority (ISA) chief at the time, Arie Mientkavich, declared war. After a two-year string of arrests, managers of provident and mutual funds from almost all the banks were brought to trial. It took seven years of court hearings, but almost all were sentenced to prison terms of one to seven years.

The arrests, the media exposure and the prison terms worked. Afraid of the ISA, the capital market by and large eschewed vicious corruption for about 10 years. But time passes, new blood comes into the market and 1994 is distant history. The market has changed, the amounts of money it handles have mushroomed tenfold and there are newer, cleverer ways to rob the clients.

Prisma is not suspected of criminal activity, just bad management. What happened there isn't the result of the new, better capital market structure following its disengagement from the banking oligopoly. There are a large number of provident and mutual funds doing much better since they waved the bankers bye-bye.

Nor do we have to return to 1994 to realize that this nostalgia for the rule of the banks is ludicrous. The worst financial trouble in the last year wasn't at some private brokerage: The biggest bank in the land had to write off a billion shekels after investing in subprime-related securities and may face more write-offs, amounting to hundreds of millions, in the days to come, analysts surmise.

The Prisma debacle is small scale, but it poses a big opportunity for capital markets commissioner Antebi and for ISA chair Zohar Goshen to come to their senses and launch a preemptive attack to protect our pension savings.

The Mientkavich raid has faded into memory. It's time for a bloody hunting safari in the financial jungle of Israel's insurance companies, banks, pension companies, and provident and mutual funds that control two trillion shekels of the public's money. It's time to thoroughly investigate the underwriting industry, the investment committees of the insurance companies, to shed light on the dark corners of the capital markets.

As for Prisma and its owner, the private equity fund Markstone, Ron Lubash, Markstone partner and chairman, and a former Wall Street investment banker used to say that he wanted to build the Israeli Fidelity with investment management free of conflicted interests, underwriting, investment banking. This week he repeated his determination to turn Prisma into Fidelity II.

First of all, Fidelity is presently a picture of misery; secondly, if Lubash wants to become a local leader, first he has to admit how badly Prisma's value has eroded since Markstone paid NIS 2 billion for it. The road to a cure passes through acknowledgment of reality, as Lubash knows the way; on Wall Street they call it "mark to market."

Trying to keep Prisma's value artificially inflated, in order to be able to report high profits for Markstone's investors (and help raise money for its sequel fund), could cost the company heavily in the future. And cost its clients as well.