Spitzer Files Charges in Mutual Fund Case
N.Y. Atty. Gen. Eliot Spitzer Files Charges Against Ex-Security Trust Execs in Mutual Fund ProbeNov 25, 2003 | AP
The first criminal charges in the mutual fund scandal were filed Tuesday by New York's attorney general, accusing three former top executives at Security Trust Co. with "pervasive misconduct" in a late-trading scheme that cost investors $1 million.
Those charged include the chief executive officer of the Phoenix-based company, which processes mutual fund trade orders for pension plans and retirement systems.
New York Attorney General Eliot Spitzer charged former Security Trust CEO Grant D. Seeger, former President William A. Kenyon and former senior vice president of Corporate Services Nicole McDermott, with grand larceny, falsifying business records and securities fraud under the state's Martin Act.
If convicted of the most serious charges, they could face eight to 25 years in prison, he said.
The Securities and Exchange Commission simultaneously filed civil charges against the former executives and the firm, and the U.S. Treasury Department's Office of the Comptroller of Currency has also begun an enforcement action that could dissolve the company.
"A coordinated response by regulators will ensure that high-ranking officials of the company and the corporate entity itself will be held accountable for schemes that defrauded investors," Spitzer said.
A message seeking comment from Security Trust was not immediately returned.
Security Trust, which administers $13 billion in assets for 2,300 pension and retirement systems, is the latest in a series of financial institutions to be accused in an improper trading scandal. Putnam Investments and Pilgrim Baxter have also been accused of wrongdoing, as have a handful of individuals.
Charges had been widely expected against Security Trust after it was mentioned in a complaint filed earlier this year by Spitzer accusing hedge fund Canary Capital LLC of improper fund trading. Canary agreed to pay $40 million to settle the charges, but admitted no wrongdoing.
The charges filed Tuesday accuse the defendants of processing trades by hedge funds hours after the market closed at the 4 p.m., allowing them to profit on after-hours news.
The fraud was accomplished by "disguising" the illegal trades as orders from one of their many pension plan clients. This deceived the funds into making the trades.
So-called late trading is prohibited by New York law and SEC regulations because it allows a favored investor to take advantage of any events that happen after the market closes that are not reflected in the fund's closing price.
Regular investors at that hour would have had to chance the next day's closing price, as mutual funds price just once per day.