Spitzer targets fund management industry
By David Wells, Gary Silverman and Deborah Brewster in New York
Published: September 3 2003 18:04 | Last Updated: September 3 2003 18:04
Eliot Spitzer, New York attorney-general, has taken aim at the fund management industry, saying his office intends to put an end to illegal trading schemes that cost investors billions of dollars a year.
Mr Spitzer announced on Wednesday an expanded investigation into mutual fund trading as he meted out his first major punishment: a $40m settlement with a hedge fund he said committed illegal trades involving mutual funds operated by Bank of America, Bank One, Janus and Strong.
The settlement - with Canary Capital Partners, two related entities, and manager Edward J. Stern - includes restitution of $30m and a $10m penalty. Canary's officers and employees also must continue to cooperate with the attorney general.
Mr Spitzer's investigation focused on schemes that exploit the fact the price of mutual fund shares are set once a day at 4 p.m. Mr Spitzer likened the practices to "betting today on Tuesday's horse races" and "playing a casino with loaded dice."
Mr Spitzer singled out Bank of America for installing special computer equipment in Canary's office that allowed the hedge fund to buy and sell shares in Bank of America's mutual funds and hundreds of other funds at the 4pm closing price until 6:30pm New York time. This is an advantage because investors buying after 4 p.m. are supposed to pay the next day's price. In return for the favor, Canary agreed to park millions of dollars in Bank of America bond funds.
Mr Spitzer said Bank of America was "essentially being bought off." He said Canary, which managed about $1bn at its peak, was able to generate returns of 110 per cent in 1999 and 50 per cent in 2000, largely thanks to late trading.
Lex
Eliot Spitzer's new target is the mutual fund industry - which may come as a relief to Dick Grasso and present and former members of the New York Stock Exchange compensation committee.
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"The full extent of this complicated fraud is not yet known," Mr Spitzer said. "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."
Mr Spitzer said his office has uncovered additional evidence of mutual fund managers permitting favored individuals and companies to engage in such trading in exchange for payments and other inducements. He would not elaborate on whether anyone else would be charged.
SEC Chairman William Donaldson said: "The conduct alleged in the complaint is reprehensible and there is no place for it in our markets.” He added that Mr Spitzer’s action illustrates the importance of the SEC's review of hedge and mutual funds and its upcoming recommendations regarding improvements and increased disclosure requirements for both.
Bank of America, Bank One, Janus and Strong said they are cooperating with Mr Spitzer.
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