By Emily Thornton
In the latest chapter in ongoing mutual-fund industry scandals, regulators have brought fraud charges against former top executives of a company that processes mutual-fund trade orders for thousands of pension plans and retirement systems. On Nov. 25, New York Attorney General Eliot Spitzer announced felony charges against three former senior executives of Phoenix-based Security Trust for assisting in the illegal late trading of mutual funds. At the same time, the Securities & Exchange Commission (SEC) filed civil-fraud charges against the company and its former execs.
As a result of the charges, the Office of the Comptroller of Currency ordered Security Trust to dissolve the company by Mar. 31 while safeguarding the interests of pensioners. "This action is an impressive example of cooperation between state and federal government agencies," Comptroller John Hawke, Jr. said in a statement. In a separate statement, Security Trust said it would cooperate "with all authorities to achieve an orderly dissolution."
The closing down of Security Trust marks a significant shift in regulators' clean-up strategy. When Spitzer championed research reforms on Wall Street, he repeatedly stated that he was not interested in forcing major firms to shut down. But in the Security Trust case, the allegations were egregious enough that Spitzer's office felt that dissolution was warranted. That means the OCC will keep the company running until pensioners and retirees have the ability to find a new company to process their trades.
In the eight-page complaint against Security Trust, Spitzer charges Security Trust's former CEO Grant Seeger, former President William Kenyon and former Senior Vice-President of Corporate Services Nicole McDermott with falsifying business records and stealing property in excess of $1 million. His complaint alleges that the defendants processed late trades with a series of hedge funds called Canary as if they were timely trades by disguising them as orders from one of their many client pension plans.
Spitzer reveals that former employee Jay Marran, who was vice-president of mutual-fund services from October, 2002, through October, 2003, and Edward Stern, the head of the series of hedge funds called Canary, alleged to him that the three former executives at Security Trust "repeatedly misrepresented and directed Security Trust employees to misrepresent to mutual funds that Canary trades were originating from retirement and pension plans."
MORE TO COME.
The defrauded mutual funds were identified in Spitzer's complaint as MFS Emerging Growth Fund, Legg Mason Value Trust Fund, Artisan International Fund, AXP International Y Fund, SEI International Equity A Fund, and SEI International Emerging Markets I Fund.
A lawyer for former CEO Grant Seeger said his client "did nothing illegal." The other two defendants could not be reached for comment. As the investigation continues, more charges against hedge funds, mutual funds, trust companies, and brokerages are likely to follow. "Pervasive misconduct must be met with appropriate sanctions," Spitzer said in a statement on Nov. 25. But the definition of "appropriate" just got a lot stiffer.
Thornton is finance and banking editor for BusinessWeek
Edited by Douglas Harbrecht