| Sec charges dallas firm with fraud { December 5 2003 } Original Source Link: (May no longer be active) http://www.washingtonpost.com/wp-dyn/articles/A36965-2003Dec4.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A36965-2003Dec4.html
SEC Charges Fund Trader With Fraud
By Brooke A. Masters Washington Post Staff Writer Friday, December 5, 2003; Page E01
A Dallas money management firm and three top executives helped big clients place thousands of predatory short-term trades in hundreds of popular mutual funds, and even went so far as to open up shop under two other names to help their clients evade detection, the Securities and Exchange Commission alleged in a civil fraud complaint filed yesterday.
Mutuals.com Inc. is the first brokerage to face corporate charges in the burgeoning mutual fund scandal. Mutuals.com earned more than $4.5 million from helping 18 institutional clients -- including nearly 10 hedge funds -- engage in market timing, a strategy that uses quick in and out trades to exploit the fact that fund share prices can lag behind the value of their underlying assets, the SEC said in a complaint filed in Texas. Timing is not illegal, but many fund companies try to stop it because it increases costs and cuts into returns for long-term investors.
Mutual fund companies tried to stop Mutuals.com -- 294 mutual funds complained about the trades Mutuals.com was placing, and several banned specific Mutuals.com clients outright, the SEC said. But the firm simply assigned its clients new account numbers and, when the fund companies complained again, created two new brokerage divisions so that it could submit trades under a new name, the filing said. The firm also allegedly helped at least one client engage in illegal after-hours trading, the SEC said. The firm allowed that client to place trades after 4 p.m. but submitted the order as if it had come in before the New York market closed, the SEC said.
"It really goes to show how far industry professionals will go to deceive innocent investors," said Spencer C. Barasch, the SEC official in charge of the case.
The civil filing marks the first time that the SEC has acted alone against a financial firm for late trading and market timing. The commission has acted in concert with state authorities in prior mutual fund trading cases, including a civil filing last month charging several Prudential Securities brokers with similarly deceptive behavior.
Barasch said the SEC discovered the short-term trading at Mutuals.com during an October inspection. The commission staff began scouring the records of brokers and fund companies for this kind of behavior after New York state Attorney General Eliot L. Spitzer revealed Sept. 3 that four fund companies and a financial management firm had allowed a New Jersey hedge fund to make improper trades.
Stephen G. Topetzes, an attorney for Mutuals.com., said the company had tried to reach a settlement with the SEC before charges were filed. "We intend to contest vigorously the claims and allegations made by the SEC, and we look forward to having those allegations evaluated in a more thoroughly developed factual context."
Both Barasch and Topetzes noted that the SEC did not find any timing or other improper behavior in the firm's own mutual funds. Those funds, known as the Vice fund and the Generation Wave funds, have about $85.6 million in assets under management, according to Lipper Inc., a fund research company.
Still, Barasch said the SEC intends to try to bar Mutuals.com and the three charged executives -- founder Richard Sapio, president Eric McDonald and compliance officer Michele Leftwich -- from the industry, which would force the funds to find a new manager.
Much of the current scandal has focused on fund companies that cut deals and profited even as their ordinary customers were losing money. But in this case, the fund companies were actively trying to prevent the practices, the SEC and industry officials said.
The American Century Funds in Kansas City, Mo., for example, tossed out a Mutuals.com account for too-frequent trading and then later refused to open another account under another name, said chief executive William M. Lyons.
"It was clear their strategy involved market timing [and] we try to live up to our prospectus," he said.
The scandal has been frustrating for firms like his, which employs eight people purely to seek out and stop timing, he said. But in the end, "the vast majority of firms see this as helpful" because it is leading to a crackdown on timers and those who help them, he said.
And more cases involving brokers may be coming. An SEC survey that found 30 percent of the largest brokerage houses had helped clients engage in timing.
"The mutual fund industry makes no excuses for those instances where fund employees violated their fiduciary duties," said Matthew P. Fink, president of the Investment Company Institute, the main mutual fund trade group. "But reforms are also needed to stop third-party intermediaries from preying on fund shareholders for personal gain."
© 2003 The Washington Post Company
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