Thanks to truthseeker for this one. Shows an angle of hedge funds and how they are becoming pervasive. Much of what we discuss is probably linked to this type of activity, the ability to game the market, to get advantage over others, to bend the rules, including the rules that supposedly prohibit naked shorting.
Bragging brokers accused of fraud
Wednesday, March 16, 2005
By KATHLEEN LYNN
STAFF WRITER
"Deviancy at its best" was the way a former Merrill Lynch broker in Fort Lee described the way he and two colleagues conducted business for a favored client, state authorities said Tuesday in accusing the trio of fraud.
Attorney General Peter C. Harvey revoked the broker licenses of Christopher Chung of Edgewater, who allegedly bragged of "deviancy," and his former colleagues, Kevin Brunnock and William Savino, both of Fort Lee. Harvey also filed a complaint seeking financial penalties against them.
The suit follows a $13.5 million settlement with Merrill Lynch in the case, announced last week. Of that penalty, $10 million will go to New Jersey and $3.5 million to Connecticut.
Harvey's lawsuit accuses Chung, Brunnock and Savino of making more than 25,000 trades for a hedge fund in a market-timing scheme that hurt long-term mutual fund investors. It also accuses the three of defrauding Merrill Lynch and the mutual funds, by hiding their activities through phony accounts and using cellphones instead of company lines.
The market timing involved rapidly trading in and out of mutual funds, which can generate quick profits for the traders but hurt long-term holders by increasing trading costs.
"These three financial advisers cheated small investors to benefit their large corporate client and |to enrich themselves," Harvey said.
The lawyer for the three men, Susan Necheles of New York, said they intend to fight the complaint.
"We think the complaint is wrong," she said. "When they were doing what they were doing, market timing was not illegal. There was no prohibition. Merrill approved of and knew about it all."
A spokesman for Merrill Lynch disputed her statement.
"Market timing was prohibited at Merrill Lynch since 1999," said spokesman Mark Herr. "They were told to stop these activities, and we fired them for violating the firm's policy prohibiting short-term trading, after they misled the firm about their activities and continued behavior they had been told to stop."
The three were fired in October 2003.
The civil complaint against Chung, Brunnock and Savino - known as the CBS Group - alleges that they began market-timing for a New York hedge fund, Millennium Partners, while they worked at UBS PaineWebber. When they moved to Merrill Lynch in January 2002, they brought the Millennium account, the source of most of their trading profits, the complaint said.
Their many trades for Millennium helped give the Paramus district, which includes the Fort Lee office, the highest revenues for all of Merrill Lynch in the first quarter of 2002, the complaint said. All told, the complaint said, the CBS Group made more than 25,000 trades for Millennium in hundreds of mutual funds while working at UBS PaineWebber and Merrill Lynch.
Market timing is prohibited by many mutual funds because it harms long-term investors by increasing trading costs and skimming off profits. But according to the complaint, the CBS group made at least one deal to avoid the prohibition: They agreed to invest long-term money in certain mutual funds, in exchange for permission to market-trade in another mutual fund in the same fund family.
On a number of occasions, mutual funds refused their trades and complained to Merrill about excessive trading, the complaint said.
The complaint charges that Chung made the comment about "deviancy at its best" in a recorded phone conversation about how the CBS Group was helping Millennium avoid sales charges on its trades.
The sales charges are meant, in part, to discourage rapid selling by market timers. When the mutual funds complained, Merrill debited Millennium's account and paid the sales charges, the complaint said.
In another recorded conversation, according to the complaint, Chung and Savino spoke of trades made on a cellphone and "never ... on our Merrill phone."
E-mail: lynn@northjersey.com |
