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SEC Charges With Fraud

Dec 4, 2003 | Wall Street Journal

The U.S. Securities and Exchange Commission on Thursday charged Inc., a Dallas investment adviser, along with three of its executive officers and two affiliated broker-dealers, with fraud related to improper trading of mutual-fund shares.

The SEC alleges that the defendants deceived hundreds of mutual-fund companies by improperly helping big investors carry out thousands of market-timing and late trades in the shares of those mutual funds.

Market timing refers to the practice of short-term buying and selling of mutual-fund shares in order to exploit inefficiencies in mutual-fund pricing. Although market timing isn't per se illegal, many mutual funds try to prevent it because it tends to harm long-term mutual fund shareholders.

Beginning in July 2001, hundreds of mutual-fund companies and two clearing firms did just that: they initially admonished that its market- timing activities were improper, but, by September 2003 , approximately 294 different fund companies had banned or otherwise restricted from trading in their shares, the SEC alleges.

Rather than desist, however, Chief Executive Richard Sapi, President Erin McDonald and Compliance Officer Michele Leftwich devised a number of ways to conceal their clients' market-timing activities. They formed two affiliated broker-dealer firms, Connely Dowd Management and MTT Fundcorp. Inc., through which they could continue to market time the funds undetected.

The defendants also changed account numbers for customers who had been blocked from making frequent trades, changed the registration numbers of advisers who placed the trades on behalf of clients, used different branch identification numbers, and switched clearing firms, among methods, according to the complaint.

The SEC also alleges that and its affiliated broker-dealers routinely allowed customers to purchase fund shares at the 4 p.m. closing price after the close of the market, a practice known as late trading.

Late trading, which allows investors to profit from late breaking news that is likely to be reflected in a fund's share price the following day, is illegal.

The SEC initially detected the alleged misconduct during an examination of the investment complex in October.

The commission is seeking permanent injunctions from further securities law violations, civil monetary penalties and disgorgement of illicit profits, plus prejudgement interest.

At the SEC's insistence, the defendants have agreed to a court-appointed monitor who will oversee management of the's own mutual funds. executives didn't immediately respond to messages left on their voice mail Thursday morning.

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