Mutual Funds

SEC Alleges that a Hedge Fund, Its Owner and Its Chief Trader Illegally Earned $57 Million in a Late-Trading Scam.

Published on: July 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission filed suit in a New York Federal Court contending that Simpson Capital Management Inc., its owner and its head trader entered into late-trades in hundreds of mutual funds, defrauding the funds and their shareholders of approximately $57 million.

The SEC claims that the defendants placed more than 10,000 unlawful mutual fund trade orders after the market closed, enabling them to take advantage of knowledge of after-market events while receiving the price previously established that day as the fund’s closing net asset value. Simpson Capital is the investment adviser to two hedge funds, Simpson Partners L.P. and Simpson Offshore Ltd.

The SEC further charged that the firm’s owner, who was also an investor in the Simpson Funds, “personally earned at least $19 million in fees and profits” as a result of the fraudulent transactions, adding that the head trader “received more than $996,000 in salary and bonuses during the late trading scheme.” The SEC is asking the court to order permanent injunctions, disgorgement plus prejudgment interest, and civil penalties.

MML Investors Services, NYLIFE Securities, Securities America and Northwestern Mutual Investment Services Fined a Total of $1.2 Million for Mutual Fund Violations

Published on: July 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD fined four firms for mutual fund sales violations and for failures to properly supervise such sales. The fine amounts are $473,000 against MML Investors Services, Inc., $354,000 against NYLIFE Securities LLC, $322,000 against Securities America, Inc. and $100,000 against Northwestern Mutual Investment Services.

The violations charged include sales of Class B and Class B shares, causing investors not to receive the benefits of price breaks on Class A shares, failures to properly notify clients of available cost free transfers from one mutual fund to another at the funds’ net asset values and failure to have adequate supervisory systems and procedures to prevent such violations.

In resolving the case, MML and Northwestern must also pay their clients who qualified for, but did not receive, the net asset transfer benefits and pay refunds to those who did not benefit from the price breaks. Including the refunds already paid, it is estimated that thousands of clients of these two firms will receive a total of more than $6.5 million.

JB Oxford Violated Late Trading Rules but Claims Against Its Former General Counsel Are Dismissed

Published on: June 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

An SEC administrative law judge found that JB Oxford Holdings, Inc. “violated the forwarding pricing rule” when it executed trades after 4pm EST at the same day price, but found the firms former general counsel was not to blame.

ALJ Robert Mahoney determined that JB Oxford Holdings was involved in over 12,000 late mutual fund trades affecting over 600 funds in violation of “forward pricing” rules but dismissed charges against Scott G. Monson, JB Oxford Holdings Inc.’s former general counsel.

The SEC charges stated that seven JBOC clients were allowed to enter into transactions after market closing at prices established and Monson drafted a procedural agreement which allowed this. However, the ALJ said Monson was not to blame because he did not know what the prices were or that there was any issue regarding the legality of the trade time.

Fees on 12 B-1 Mutual Funds (or “B Shares”) Under Renewed SEC Scrutiny

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

“B Share”, or “back-end load”, mutual fund issues are being reconsidered by The Securities and Exchange Commission. The “B share” nick-name is derived from Rule 12 b-1 of the Investment Company Act of 1949, amended a quarter century ago to allow for the creation of such shares.

To combat a huge growth in “no load” mutual funds in the 1980’s, commission based investment firms lobbied for the creation of a product to compete. In response, the U. S. Congress agreed to amend the Investment Company Act to provide for a new class of mutual funds. On such funds, mutual fund companies can, instead of charging the investor an up-front commission, pay commissions to investment firms and their brokers right away, then charge the investor fees over time to recoup those commissions.

Since that time regulators have been besieged with complaints regarding B Shares. Deception, omission and out-and-out misrepresentations have often been made to lure investors into believing such funds are “no load”. Most observers acknowledge the potential for such abuse, yet little has been done to address the issue.

Securities and Exchange Commission Charges Clarion Management LLP and Its Hedge Fund Manager With Involvement In Alleged Market Timing Scheme

Published on: February 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Clarion Management LLP and its hedge fund manager, John Fife, with allegedly buying variable annuity contracts, with the intention of taking part in market timing in mutual funds on behalf of the hedge fund.

According to the SEC, in their lawsuit filed in the U.S. District Court of the Northern District of Illinois on January 18, Fife and Clarion Management allegedly made hundreds of thousands of dollars in profits at the expense of other shareholders. The Securities and Exchange Commission wants the court to order disgorgement plus prejudgment interest, injunctive relief, and civil penalties.

The SEC claims that Clarion Management and Fife allegedly took part in a fraudulent scheme to buy variable annuity contracts issued by the Lincoln National Life Insurance Company for Clarion Capital LP. The purpose of these purchases was to take part in market timing. The SEC says that Clarion Capital was created to market time international funds through variable annuities and that Clarion Management and Fife engaged in deceptive methods to buy contracts and take part in market timing to benefit Clarion Capital. One example the SEC cited was that of Clarion Management and fife using limited liability companies and trusts as nominee beneficiaries and contract owners to cover up the fact that Clarion Capital had a financial interest in the variable annuity contracts.

Former Putnam CEO Agrees To Pay $75,000 In SEC Charges

Published on: January 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Lawrence Lasser, the former CEO of Putnam LLC, has agreed to pay $75,000 to settle SEC charges that he neglected to make sure the company carried out its fiduciary duties.

The Securities and Exchange Commission issued the following statement on January 9, the day that Lasser agreed to pay the settlement fee. According to the SEC, Lasser “did not ensure that Putnam fulfilled its fiduciary duty to disclose adequately to the Putnam Funds’ board of trustees the use of fund brokerage commissions to pay for ‘shelf space’ arrangements or potential conflicts of interest created by this use.”

By agreeing to pay the settlement fine, however, Lasser is not admitting or denying the SEC’s charges against him.