Spitzer, OCC Issue Corporate Death Penalty
The news came right before the Thanksgiving holiday, so you might
have missed it. But let there be no doubt: The mutual fund
investigations have now gone nuclear.
New York State Attorney General Eliot Spitzer told a U.S. Senate
committee last Tuesday that he wants an entire firm
“dissolved” for its role in the mutual fund-hedge fund
trading shenanigans. And so does the Comptroller of the Currency, which
is working to shut down the company, Security Trust, by March 31.
“It’s unprecedented,” says one industry observer.
“I mean, they said, ‘It’s over. You’re
done.’ Amazing.”
Spitzer’s office, the SEC and the Comptroller of the Currency,
working together, are seeking “an accounting, disgorgement and
penalties” from Security Trust and its top executives. In
essence, the regulators have declared Security Trust, a mutual fund
intermediary based in Phoenix which allegedly made illegal trades on
behalf hedge funds, a criminal organization—run by, well,
criminals. The firm’s three top executives were charged with
larceny, record falsification and fraud.
The regulators slapped Security Trust and its top executives with civil
and criminal charges connected to helping hedge funds make
“illegal mutual fund” trades. Security Trust is accused of
masking those trades through pension plans it controls on behalf of
several different hedge funds, including the much-maligned Canary
Capital. And then sharing in the profits. According to the SEC,
Security Trust brought in approximately $5.8 million from hedge funds
through their dealings, namely through a higher custodial fee and a 4
percent profit-sharing plan. Doesn’t sound like much, but the
firm is charged with facilitating Canary’s trading in 400
different mutual funds hours after the close, helping the hedge fund
reap $85 million in ill-gotten profits.
Some observers believe the regulators are coming down hard on Security
Trust because the staid, fiduciary nature of its business magnifies the
seriousness of its alleged offenses. Investors view trust firms as
bastions of investment safety and conservatism, and in this context,
abuses like market timing and late trading for a favored client become
even greater betrayals of investor trust than similar abuses at other
investment firms.
Security Trust served as custodian for more than 2,500 retirement plans
and around $12 billion in retirement assets and is the largest
independent trust company. Its role is as a conduit between pension
plans and fund companies, and its arrangement with more than 200 fund
families gives it access to more than 5,000 different funds. Its
relationship with Canary gave that mutual fund the ability to trade
after the 4:00 p.m. close using Security Trust’s extensive
platform, provided that Security would mask the transactions.
Representatives at Security Trust were unavailable for comment. But the
whole story could be summed up in the words of Spitzer, speaking in
front of a Senate panel last week: “The company is
history.”
Read the SEC’s complaint against Security Trust and its
executives here:
http://www.sec.gov/litigation/litreleases/lr18479.htm
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