N.Y. Charges Three in Mutual Fund ProbeNov 25, 2003 | AP
Three former top executives at Security Trust Co. were charged Tuesday with acting as middlemen in an illegal trading scheme that cost investors $1 million, and authorities ordered the company to shut down.
Those charged with felonies by New York Attorney General Eliot Spitzer include the chief executive of the Phoenix-based company, which processes mutual fund trade orders for pension plans and retirement systems.
Spitzer, who first cracked the mutual fund scandal that has widened to include dozens of firms, said in an interview Tuesday that he would be "very surprised" if more criminal cases are not brought against other companies.
Authorities said the Security Trust executives acted as middlemen for hedge funds that made $85 million in profits from the mutual funds in the late-trading scheme. Security Trust made $5.8 million from the deals.
No criminal charges were filed against Security Trust, Spitzer said, because the U.S. Treasury Department's Office of the Comptroller of Currency ordered the company to be dissolved by March 31.
The Securities and Exchange Commission simultaneously filed civil charges against the former executives and Security Trust.
A company spokeswoman, Nancy Murphy, said it was cooperating with regulators to ensure that its clients were steered to other firms that provide similar services.
Security Trust, which administers $13 billion in assets for 2,300 pension and retirement systems, is the latest financial institution to be accused of improper trading. Putnam Investments and Pilgrim Baxter also have been accused of wrongdoing, as have a handful of individuals.
Former Security Trust CEO Grant D. Seeger, 40, former president William A. Kenyon, 57, and former senior vice president of corporate services Nicole McDermott, 34, were charged with grand larceny, falsifying business records and securities fraud. The most serious charges carry prison terms of eight to 25 years.
An attorney for Seeger did not respond to a request for comment. Telephone numbers for Kenyon and McDermott were not immediately available.
Charges had been widely expected against Security Trust after it was mentioned in Spitzer's Sept. 3 complaint accusing hedge fund Canary Capital LLC of improper trading. Seeger resigned Oct. 6.
Canary agreed to pay $40 million to settle the charges, but admitted no wrongdoing. Canary's Edward Stern is cooperating with Spitzer as part of that settlement.
The Security Trust executives are accused of processing trades by hedge funds hours after the market closed, allowing them to profit on after-hours news. Late trading is prohibited by New York law and SEC regulations.
Security Trust also devised several ways to try to disguise trades to allow hedge funds to jump in and out of funds, a practice called market timing, to profit on price fluctuations, the SEC said. The practice is not illegal, but is prohibited by many funds because the practice skims profits from longer-term shareholders.