CIBC Unethical Mutual-Fund Trades. Paul Flynn, the former Canadian Imperial Bank of Commerce executive whom regulators believe helped arrange $1 billion in financing used by hedge funds for unethical mutual-fund trades, was arrested Tuesday, sources said.
Flynn was arrested at his home in Larchmont, N.Y., by authorities attached to the New York attorney general, Eliot Spitzer, for violations under the Martin Act, a 1921 state law governing securities sales. The law was the basis for Spitzer’s September 2002 suit seeking the return of $1.5 billion in stock proceeds from former WorldCom Chief Executive Bernard Ebbers, among other prosecutions.
Sources said Flynn will be arraigned later Tuesday in a New York State court. The Securities and Exchange Commission also plans to charge Flynn.
Flynn’s attorney declined to comment. A spokesman for Spitzer also declined to comment. A person answering the phone at Flynn’s home said she did not know where the former investment banker was. She said she did not know if he had been arrested.
biggest financier of hedge funds
The arrest of Flynn is a significant turn in the investigation into the $7 trillion mutual fund industry because CIBC was the biggest financier of hedge funds engaged in market timing and late trading. The bank is believed to be in advanced settlement talks with Spitzer’s offices and the SEC.
Along with Jeffrey Haas, Flynn ran the hedge fund financing operation at CIBC. Both were let go by the Toronto bank in December, along with an in-house attorney who reviewed their financing deals. They were followed out the door this month by their supervisor, Robert Deutsch, CIBC’s former head of U.S. arbitrage and derivatives trading.
Attorneys for Haas and Deutsch could not be reached for comment.
Sources previously told TheStreet.com that Flynn’s group at CIBC specialized in using credit derivatives, most commonly “total return swaps,” a popular leverage tool in the hedge fund world. Hedge funds favor the vehicle, in which the economic performance of a specified asset is exchanged for cash payments pegged to a benchmark, because they act like loans with a more favorable tax treatment. The group also provided standard margin loans.
Regulators believe the $1 billion in CIBC financing enabled a select group of hedge funds to make big profits from market-timing mutual fund shares and possibly other improper trading activities. CIBC, meanwhile, was able to book highly profitable loans to clients whose risk was limited by the relatively sure-thing nature of their objectionable trading strategies.
Sources familiar with the investigation by the SEC and Spitzer’s office said much of the $1 billion went to bankroll the hedge fund clients of Michael Sassano, an Oppenheimer & Co. stockbroker who turned mutual fund market-timing into a $10-million-a-year gold mine for himself.
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