Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, November 20, 2009

SEC Finds Broker-Dealer Orchestrated Lating Trading Fraud

The SEC, in an administrative proceeding, found that Joseph John VanCook, a former salesperson and partial owner of Pritchard Capital Partners, LLC, a registered broker-dealer, willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 by orchestrating a fraudulent scheme involving "late trading" of mutual fund shares, i.e., "the unlawful practice of permitting mutual fund orders received after the 4:00 p.m. [fund share] pricing time to receive the [net asset value, or "NAV"] calculated at or as of 4:00 p.m. that day, instead of 4:00 p.m. the following trading day." The Commission found that VanCook accepted and recorded orders to trade mutual fund shares from clients before 4:00 p.m. but permitted three hedge fund clients to change or cancel those orders after the markets closed at 4:00 p.m. without recording the time at which they made those final trading decisions. The Commission found that, in submitting those orders to his firm's clearing broker, VanCook created "the false impression that final orders associated with [those] accounts were placed before 4:00 p.m. and were therefore entitled to that day's NAV when in fact they were not."

The Commission concluded that, as a result of VanCook's scheme, his "late-trading clients obtained an undisclosed advantage, at the expense of other shareholders of the relevant mutual funds, when they learned of market-moving information and were able to buy, exchange, or sell mutual fund shares at NAVs set before the market-moving information was released. The mutual funds at issue were deceived into providing improper prices for those orders contrary to their prospectus language and transmitting and effecting orders contrary to their published policies and procedures, as well as applicable rules and regulations, thereby harming or causing the risk of harm to shareholders who made investment decisions premised upon improper prices and suffered dilution to the value of their shares." The Commission also found that VanCook aided and abetted and willfully caused the Firm to violate Exchange Act Section 17(a)(1) and Exchange Act Rule 17a-3(a)(6) by failing to make and keep current certain books and records in that he established the order-taking system by which the time of receipt of his late-trading clients' final trade decisions was not recorded.

For these violations, which the Commission noted involved "nearly 5,000 late mutual fund orders effecting the purchase and sale of billions of dollars' worth of mutual fund shares," VanCook was barred from association with any broker or dealer and ordered to cease and desist from committing future violations of the antifraud provisions, to pay disgorgement plus prejudgment interest, and to pay a civil money penalty. (Rel. 34-61039; File No. 3-12753)

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