Charges Filed in N.Y. Mutual Fund CaseSep 16, 2003 | AP New York prosecutors filed the first criminal counts Tuesday in their investigation of mutual fund trading practices, charging a former Bank of America broker in a scheme they said cost investors tens of millions of dollars.
Theodore Sihpol III, 36, surrendered Tuesday to face felony charges of grand larceny and violations of securities law, New York Attorney General Eliot Spitzer said at a news conference where the Securities and Exchange Commission also announced civil charges against Sihpol.
Sihpol was in custody following his arraignment in Manhattan Criminal Court late Tuesday. Judge Melissa Jackson set bond at $750,000 and agreed it could be secured by $50,000 in cash, but Sihpol brought a certified check. He was expected to be freed on bond by Wednesday morning at the latest.
Authorities allege Sihpol helped Canary Capital Partners, a multimillion-dollar hedge fund, gain special trading opportunities known as late trading, in which mutual fund shares are bought at the 4 p.m. price after the market closes. Late trading is prohibited by New York law and SEC regulations. Ordinary investors who place late orders must pay the following day's price.
"Under these circumstances, given the absence of criminal intent on Ted's part, we believe that proceeding against him with a criminal complaint was inappropriate," Buchwald said.
Bank of America, which fired Sihpol and several others last week, reiterated Tuesday that it is cooperating fully with investigators. A spokesman declined to comment on allegations raised in the complaint.
If convicted of the criminal charges, Sihpol faces eight to 25 years in prison. He also could face substantial fines and be banned from the securities industry for life if the SEC finds he violated the law.
It was the first criminal complaint filed in the case since Spitzer's office began investigating the mutual fund industry earlier this year. The investigation became public Sept. 3, when Spitzer announced that Canary had agreed to pay $40 million to settle charges that it had improper trading arrangements with several mutual fund companies, including Bank of America. Canary did not admit or deny wrongdoing and has cooperated with investigators.
Spitzer declined to say whether Bank of America had similar arrangements with other hedge funds.
Several dozen mutual fund companies and a smaller number of hedge funds have been subpoenaed. Spitzer said new information has been "pouring in at a surprising rate," but declined to elaborate.
"This is a wide-ranging and continuing investigation likely to result in numerous other charges," Spitzer said. "There is an effort by my office and the SEC to pursue what we believe to be a serious market problem."
Sihpol, who worked with Bank of America's high-net worth group in New York, was "at the center of the relationship between Canary and Bank of America," Spitzer said, helping the hedge fund make hundreds of late trades between April 2001 and July of this year. In exchange, Canary paid fees to the firm and agreed to make large, long-term investments in certain Bank of America funds, the complaint said.
Initially, authorities said, Canary traders would call or fax a list of trades to Sihpol and his team before the markets closed at 4 p.m. ET, and Sihpol's staff would fill out an order ticket, time stamp it and set it to one side. A Canary trader would phone Sihpol or one of his subordinates later, sometimes as late as 6:30 p.m. ET, and either confirm or cancel the "proposed" trades; if the order was canceled, the ticket would be discarded, the complaint said.
In the summer of 2001, Bank of America technicians installed a system in Canary's offices that would allow the hedge fund's traders to enter orders directly until 6:30 p.m. ET. Sihpol or a member of his team would reconcile Canary's trades the following day, the complaint said. A second direct access system was installed in the home of a Canary trader, it said.
Sihpol's actions "allowed a favored hedge fund customer to benefit at the expense of thousands of other investors," said Stephen Cutler, enforcement director for the SEC. Allowing shares to be traded at the 4 p.m. price after the market closed violated "one of the basic rules designed to assure all purchasers and sellers are treated the same," he said.
By making the joint announcement, Cutler and Spitzer sought to allay speculation that state investigators had trumped federal authorities by taking the lead in the investigation. Cutler praised the attorney general for acting on the information that led to the investigation, and emphasized that their goals were the same.
"Our combined message is clear: Late-trading is wrong," Cutler said.