Sunday, February 19, 2012
District Court Emphasizes Differences Between Late Trading and Market Timing in SEC Action
On Feb. 14, Judge Sweet (S.D.N.Y.) handed down a 128 page opinion finding that Pentagon Capital Management PLC (PCM) and Lewis Chester violated federal securities laws by orchestrating a scheme to defraud mutual funds through late trading. He rejected the SEC's contentions that the defendants also violated the securities laws through their market timing, because the SEC did not establish that at the time of the trades market timing rules were sufficiently clear to permit liability. He granted the SEC injunctive relief, as well as $38.4 million in disgorgement and $38.4 million as a civil penalty. The SEC Release contains a link to the opinion.
The opinion followed a bench trial that lasted 17 days and heard from 18 witnesses. The opinion provides a thorough recital of the facts and the applicable law. With respect to the market timing charges, the Judge notes that liability turns on the "often blurry line between outwitting another in the marketplace and defrauding him." In contrast to the uncertainty about market timing, SEC regulation and uniform industry practice required a hard 4 p.m. cutoff for placing trades, so that the line is "startlingly bright" -- late trading is per se frauduluent.