Friday, July 8, 2005

Broker Pleads Guilty to Mutual Fund Late Trading Charge

New York Attorney General Eliot Spitzer's office announced a plea agreement with Scott Christian, a broker with Trautman Wasserman & Co., Inc., for executing thousands of after-hours trades for hedge funds in various mutual funds (press release here).  Christian entered a guilty plea to violating the Martin Act, New York's broad securities fraud statute. In addition, the SEC filed a civil enforcement suit alleging violations of the federal securities antifraud provisions related to the trading. The SEC Litigation Release (here) states:

Between January 2001 and September 2003, Christian, together with others at Trautman Wasserman, engaged in late trading on behalf of customers. "Late trading" refers to the practice of placing orders to buy, redeem, or exchange mutual fund shares after 4:00 p.m. Eastern Time, the time as of which mutual funds typically calculate their net asset value ("NAV"), but receiving the priced based on the prior NAV already determined as of 4:00 p.m. Late trading enables the trader to profit by basing trades on market events that occur after 4:00 p.m. Christian carried out the late-trading scheme by having customers submit proposed mutual-fund trading orders during the trading day and time-stamping them just before 4:00 p.m. to make it appear that customer orders were received before 4:00 p.m. Christian did not, however, enter these proposed trades for execution. Instead, Christian communicated with customers after 4:00 p.m. and often until 6:30 p.m. or later to determine if the customers wanted to execute the proposed orders or submit different orders based on post-4:00 p.m. market information. After customers made their final post-4:00 p.m. trading decisions, Christian entered orders into the trading system used by Trautman Wasserman.

In another mutual fund late trading case that garnered significant publicity, Spitzer's office will retry former Bank of America broker Theodore Sihpol on four charges on which the jury deadlocked after acquitting him of 29 other counts related to his role in allegedly facilitating after-hours trading by Canary Capital, a hedge fund.  A MarketWatch story (here) notes that the jury vote on the four counts (two for falsifying business records and two for fraud) was 11-1 in favor of acquittal, but the N.Y. Attorney General's office is pressing ahead, with the retrial set for Aug. 22.  A Wall Street Journal article (here) indicates that Sihpol turned down a plea offer from Spitzer's office.  This one sure sounds like a tough case for the prosecutors. (ph)

Civil Enforcement, Fraud, Prosecutions, Securities | Permalink

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Tracked on Jan 17, 2006 6:38:14 AM