Illegal Mutual Fund Trading Schemes
Illegal mutual fund trading schemes cost small investors billions of dollars.
If you bought mutual funds from any of these leading companies – Bank of America's Nations Funds, Banc One, Janus and Strong – and suffered huge losses, you may be able to recover some of your losses.
On September 3, 2003, Canary Capital Partners, LLC - a multi-million dollar hedge fund - entered into a $40 million settlement with New York Attorney General Eliot Spitzer. The charges: It engaged in illegal trading with several large mutual fund companies that potentially cost investors billions of dollars.
Shortly thereafter, on September 16, a former broker at Bank of America, Theodore C. Sihpol III, was charged with larceny and securities fraud. He was the first broker to face criminal charges for helping the hedge fund engage in after-hours trading of mutual fund shares.
In regard to the Canary Capital Partners case, Spitzer said, “The full extent of this complicated fraud is not yet known. But one thing is clear: The mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system. They make illegal after-hours trades and improperly exploit market swings in ways that harm ordinary long-term investors.”
Spitzer's office began its investigation into mutual fund practices earlier this year. Practices known as “late trading” and “market timing” quickly became the focus of the investigation.
Late trading
This practice involves purchasing mutual fund shares at the 4:00 p.m. price after the market closes. Late trading is prohibited by the Martin Act and SEC regulations because it allows a favored investor to take advantage of post-market-closing events not reflected in the share price set at the close of the market.
Market Timing
This investment technique involves short-term, “in and out” trading of mutual fund shares, which has a detrimental effect on the long-term shareholders for whom mutual fund investors are designed.
Mutual fund companies state in their prospectuses that they discourage or prohibit these practices, but evidence uncovered by Spitzer's office shows that mutual fund managers permitted favored individuals and companies to engage in such trading in exchange for payments and other inducements.