TOP STORIES -- Dec. 28 - Jan. 2

Major Stock Indexes Cap a Banner Year

U.S. markets put the finishing touches on a banner year last week, adding to the rebound that enabled Wall Street to avoid a fourth straight year of losses.

For the week, the Standard & Poor’s 500 index rose 1.1% and the Dow Jones industrial average 0.8%. It was the sixth straight weekly advance for both indexes -- the longest winning streak for the S&P; 500 since March 1998. The technology-laden Nasdaq composite index added 1.7% for its fourth straight weekly gain.

The gains capped a year that saw the Dow jump 25.3% and the S&P; 500 rise 26.4%. Nasdaq did even better, rocketing 50%.

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IRS to Audit Hundreds of Its Own Workers

The Internal Revenue Service is auditing 800 of its own employees after discovering that a handful of IRS workers may have cheated on their tax returns.

“I am disappointed that a small, but unacceptable number of our employees have generated false business deductions to reduce their taxes,” IRS Commissioner Mark W. Everson said.

The audits were spurred by a tip from an IRS employee that some agency workers might be filing bogus Schedule C tax forms, used to list profit and loss from self-employment or a small business. The Treasury Inspector General for Tax Administration examined 25 IRS employee returns that included Schedule Cs and found that about half contained questionable deductions or other information.

Several employees have been fired, IRS officials said. Some are still under investigation.

Everson said he expected that many of the 800 employees who were being audited would be able to substantiate their business deductions.

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California Jumps Into Mutual Fund Fray

Atty. Gen. Bill Lockyer announced an investigation into whether three large fund firms based in California failed to tell investors that they paid brokerages to recommend their funds.

The companies under scrutiny, according to sources, are Newport Beach bond giant Pimco Funds; Capital Research & Management Co. of Los Angeles, which runs the American Funds group; and Franklin-Templeton Investments of San Mateo. The firms were served with subpoenas seeking trading records.

The civil probe focuses on what is known as directed brokerage, in which fund firms pay brokerages to push their funds to individual investors. Though such payments have received less attention than the market timing and late trading abuses at the core of the industry scandal, experts say they could be more harmful and costly to small investors.

An American Funds spokesman said the firm had followed “all existing rules and regulations” in its relationships with brokers and had done nothing improper. A Franklin Templeton spokeswoman said, “A subpoena is a request for information and does not imply any wrongdoing.”

Calls to Pimco seeking comment were not returned.

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U.S. Says It Will Ban Diet Aid Ephedra

The Bush administration announced that it would ban ephedra, the herbal derivative used for weight loss, in what would be the federal government’s first prohibition of a dietary supplement.

Federal officials said they had conclusive medical proof that the stimulant presented an “unreasonable risk” even when used as directed. Ephedra has been linked to heart attacks, strokes and at least 155 deaths.

Officials expected to issue a rule in several weeks imposing the ban, which would then take effect in 60 days. The Food and Drug Administration is sending letters to 62 manufacturers asking them to halt sales of products containing ephedra.

U.S. officials said the ban was likely to be challenged in court by manufacturers, many of which maintain that ephedra is safe if properly used.

Six manufacturers, including Herbalife International of Los Angeles and Metabolife International of San Diego, accounted for about 70% of the $1.3 billion of ephedra sales in the U.S. in 2002, according to the Nutrition Business Journal.

Ephedra sales in 2003 fell about 60% as retailers and manufacturers dropped the supplement in advance of the federal ban.

California, New York and Illinois banned the supplement earlier last year.

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Consumer Confidence Drops, Spurring Worry

Consumer confidence fell unexpectedly last month and other indicators paused, suggesting the economic recovery might not be quite as unbridled as thought.

The Conference Board, a business research group, said its consumer confidence index slipped to 91.3 from November’s year-plus high of 92.5, largely on doubts that corporate America was beginning to hire again. Economists had predicted that the index would rise slightly.

The Conference Board’s current-conditions index fell to 73.9 in December from 81.0 in November. The other part of the board’s measure -- based on what consumers said they expected the economy to be doing in six months -- rose to 102.9 from 100.1 in November.

Also, sales of previously owned homes fell from a 6.35-million-unit annual pace in October to a 6.06-million rate in November, according to the National Assn. of Realtors.

In manufacturing, the Chicago Purchasing Managers index slipped to 59.2 in December from 64.1 in November but remained well above the 50 mark that is the tipping point between expansion and contraction.

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Late Shoppers Save Holiday Sales Results

After an uncertain start, shoppers finished out the holiday season on a strong note. Sales at established stores in the week ending Dec. 27 were up a solid 5.5% from 2002, according to a closely watched tally of 79 retailers.

The week “made the season” for retailers, said Michael P. Niemira, chief economist and research director for the International Council of Shopping Centers, which compiled the so-called same-store sales results in conjunction with investment firm UBS Securities.

Across the country, the season got off to a somewhat good start in November, partly because retailers made a strategic decision to lower prices early to lure customers. Then, in the first two weeks of December, major storms on the East Coast kept people at home.

Sales bounced back in the third week and continued to gather steam through Christmas.

In 2002, same-store sales rose just 0.5% for November and December combined, the weakest gain in three decades.

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Ralphs Allegedly Hires Behind the Lockout

Ralphs supermarket managers have hired back dozens of union workers under false names and Social Security numbers despite an official lockout, according to a union lawsuit.

The lawsuit filed in Los Angeles County Superior Court alleges that at least 50 to 100 union employees have been covertly rehired by Kroger Co.-owned Ralphs. Two locked-out union members said they were coached by store managers to use their children’s Social Security numbers to avoid detection.

United Food and Commercial Workers officials said that if Ralphs is found to be hiring back union workers, the lockout could instead be deemed a selective layoff, which could make those workers eligible for unemployment benefits and give the union leverage in contract negotiations.

Ralphs spokesman Terry O’Neil denied that managers were knowingly hiring back employees.

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Investors Pour Money Into Stock Funds

Investors continue to show faith in stock mutual funds despite the industry’s trading scandals, and are pouring cash into equity funds at a pace not seen since 2000. Equity funds hauled in a net $14.9 billion in November.

Fund flows measure investors’ new purchases of fund shares, minus redemptions.

Boosted by the bull market that has reversed three years of losses for stocks, equity funds took in a net $138.1 billion through the first 11 months, said the Investment Company Institute, the fund industry’s main trade group.

That means 2003 could see the best inflow for stock funds since 2000. In 2002, investors redeemed a net $27.7 billion, ICI data show.

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Artist Can Do What He Will With Barbie Dolls

Mattel Inc. lost another round in its legal battle against artists who skewer the iconic doll in social commentary.

In the case, the U.S. 9th Circuit Court of Appeals affirmed a lower-court ruling that the El Segundo company had stepped over the line when it sued a Utah artist who photographed naked Barbie dolls stuffed into blenders, rolled up in enchiladas and speared on fondue forks.

The court ruled that the toy maker ought to pay the legal costs Tom Forsythe racked up defending his “Food Chain Barbie” artwork, a bill that is expected to exceed $2 million.

The copyright law’s “fair use” exception gives Forsythe the right to strip and contort the doll for his art, the court said.

Forsythe’s “infringement had no discernible impact on Mattel’s market for derivative uses,” the court said. “The benefits to the public in allowing such use -- allowing artistic freedom and expression and criticism of a cultural icon -- are great.”

A Mattel spokeswoman did not return calls for comment.

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From Times Staff

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For a preview of this week’s business news, please see Monday’s Business section.