The New York Attorney General’s Office has announced that Attorney General Eliot Spitzer, also now Governor-elect of New York, is filing a lawsuit against Samaritan Asset Management Services Inc., Johnson Capital Management Inc., and the principals of both companies for allegedly participating in a fraudulent mutual fund market timing scheme. The principals are Edward T. Owens and Michael A. Johnson, respectively. According to the lawsuit, all parties knew they were being deceptive by “flying under the radar” so they could avoid the monitoring systems geared toward detecting market timing in regard to mutual funds. The lawsuit is looking to enjoin the defendants from engaging in such deceptive practices and wants there to be a restitution of money for their fraudulent actions.
Johnson Capital, Samaritan, and their principals are believed to have been “piggybacking” their trades onto investment accounts of retirement plans that were customers of trust company and national banking association Security Trust Company (STC) and of varying the amount of each trade so the mutual funds wouldn’t notice.
In an October 22, 2001 email sent to Johnson Capital by an STC employee:
“When trading the piggy back accounts, try to adjust the buy and sell amounts. Meaning, do not complete the sell trades for the same amount as the buy trade from the previous day. Same with [exchanges], do not use the same amount–vary each in and out trade. … This will assist us in trying not to bring attention to the trading.”
Market timing takes place when trading occurs to take advantage of short-term price differences. Although not illegal, this practice is a detriment to long-term shareholder value and is not allowed with mutual funds.
The Investment Company Institute offers the following answers to questions about market timing:
What is market timing?
Market timers dip in and out of mutual funds hoping to profit from anticipated short-term market moves up or down. Because of time zone differences among international stock markets, market timers frequently target funds that invest in foreign stocks. This strategy is called “time zone arbitrage.” It seeks to exploit fund share prices that are based on closing prices of foreign securities established some time before the fund calculated its own share price.
Market timing in and of itself is not illegal. In fact, there are some mutual funds that promote themselves as suitable for short-term trading. A key issue in the current investigations is whether some funds had market-timing policies that were selectively enforced. That would allow some fund investors to market time while others could not or were subjected to penalties if they did.
But if it’s legal, why do some mutual funds discourage it?
Rapidly buying and selling mutual fund shares can disrupt efficient fund management because it can force fund managers to hold excess cash or sell holdings at inopportune times to meet redemptions. It also can boost the fund’s trading and administration costs. Long-term investors forfeit return as a result.
The lawsuit against Samaritan, Johnson Capital, and their principals was filed in New York County at the New York State Supreme Court.
In a related investigation, STC CEO Grant Seeger pleaded guilty last year to second degree grand larceny and violating the Martin Act. STC President William Kenyon also pleaded guilty to a felony charge of violating the Martin Act.
Attorney General Spitzer’s office has reached approximately 20 settlements with firms since he began investing the mutual fund industry in 2003. Investors have received $3.7 billion dollars in restitution, and a number of those he has charged have pled guilty.
The stockbroker arbitration law firm of Shepherd Smith Edwards & Kantas LTD LLP has an experienced team that is devoted to assisting investors nationwide to recover losses caused by inappropriate actions of stockbrokers and their firms. We have successfully represented thousands of investors nationwide. For a free consultation, contact Shepherd, Smith, and Edwards today.
New York Attorney General Eliot Spitzer Sues Hedge Fund, Rojo.com, November 20, 2006
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