Eliot Spitzer, the New York state attorney general, yesterday filed the first criminal charges stemming from his investigation into the US mutual funds industry and warned that more were likely to follow.
Theodore Sihpol III, a former broker with Bank of America, surrendered to authorities in New York and faces two counts of larceny and securities fraud. He could be jailed for between eight and 25 years if found guilty.
The securities and exchange commission, the US regulator, also filed civil charges alleging that the broker violated federal securities laws.
Mr Sihpol, 36, was dismissed from Bank of America. He is one of at least six employees in the firm’s mutual funds business to have left since the first results of Mr Spitzer’s investigation into improper trading were announced this month.
The investigation has rocked the $7 trillion mutual funds business, favoured by many ordinary Americans as a safe haven for their money and commonly used for retirement and college savings plans.
“This is a wide-ranging and continuing investigation which is likely to result in numerous other charges,” Mr Spitzer said.
The investigation relates to “late trading” in mutual funds. This allows favoured clients to buy shares in funds after the 4pm close of the market when the price is set, allowing them to profit on market-moving events beyond the end of the session. Mr Spitzer has likened the practice to allowing investors to bet on a horse race after it is over.
In a $40m settlement with the hedge fund Canary Capital Partners two weeks ago, Mr Spitzer implicated mutual funds owned by Bank of America, Janus, Strong Capital Management and Bank One. Canary did not admit wrongdoing in the settlement.
Mr Spitzer alleges that Mr Sihpol played a central role in enabling certain hedge fund customers, including Canary, to engage in late trading in shares of funds offered by Bank of America. Mr Spitzer said that illegal trading schemes “potentially cost mutual fund shareholders millions of dollars annually”.
He was surprised at how rife improper trading appeared to be. “We have seen more impropriety than we would have expected. We do not yet know whether it was just one employee at Bank of America or many others at the bank or other firms.”