Criminal charges were filed Tuesday against three former top executives at Security Trust Co. for allegedly acting as middlemen for hedge funds in an illegal late-trading scheme that cost investors $1 million.
Those charged with felonies by New York Attorney General Eliot Spitzer include the chief executive of the Phoenix-based company, which processes mutual fund trade orders for pension plans and retirement systems.
The charges were the first criminal complaints filed by Spitzer, who first cracked the mutual fund scandal that has widened to include dozens of firms.
Former Security Trust CEO Grant D. Seeger, former President William A. Kenyon and former senior vice president of Corporate Services Nicole McDermott were charged with grand larceny, falsifying business records and securities fraud under the state’s Martin Act. All three had left the firm after allegations of improper trading surfaced in September.
If convicted of the most serious charges, they could face eight to 25 years in prison, he said.
The Securities and Exchange Commission simultaneously filed civil charges against the former executives and the firm, and the U.S. Treasury Department’s Office of the Comptroller of Currency has also begun an enforcement action that could dissolve the company.
“A coordinated response by regulators will ensure that high-ranking officials of the company and the corporate entity itself will be held accountable for schemes that defrauded investors,” Spitzer said.
Security Trust made about $5.8 million from the improper deals with hedge funds, the SEC said.
A message seeking comment from Security Trust was not immediately returned.
Security Trust, which administers $13 billion in assets for 2,300 pension and retirement systems, is the latest in a series of financial institutions to be accused in the scandal. Putnam Investments and Pilgrim Baxter have also been accused of wrongdoing, as have a handful of individuals.
Charges had been widely expected against Security Trust after it was mentioned in a complaint filed in September by Spitzer accusing hedge fund Canary Capital LLC of improper fund trading.
Late trading is prohibited by New York law and SEC regulations because it allows a favored investor to take advantage of any events that happen after the market closes at 4 p.m. Eastern time.
According to that complaint, Security Trust “gave Canary the ability to trade hundreds of additional mutual funds as late as 9 p.m. New York time. So profitable was this opportunity that STC ultimately demanded, and received, a percentage of Canary’s winnings.”
Canary agreed to pay $40 million to settle the charges, but admitted no wrongdoing.
UBS fires 2 brokers
Meanwhile, Switzerland’s biggest bank, UBS, fired two U.S.-based brokers and suspended nine more for violating its mutual fund trading rules meant to protect investors.
UBS spokesman Christoph Meier said Tuesday the bank had informed U.S. regulatory authorities of the move on Monday. He declined to name the two brokers who were fired, and said the other nine would likely be allowed to return to work in a few weeks.
Meier said an internal review conducted into brokerage PaineWebber - which UBS acquired in 2000 and renamed as UBS Financial Services earlier this year - had revealed the breaches in company rules.
The brokers allegedly helped customers make rapid in-and-out mutual fund trades known as timing trades. Although this wasn’t illegal, it violated company policy drawn up in December 2001 to protect longer-term investors, said Meier.
A lengthening list of financial institutions and individuals have become embroiled over the past three months in continuing state and federal investigations of improper trading in the U.S. mutual fund business.
Meier said the disciplinary measures were unrelated to last week’s swoop by U.S. federal prosecutors against dozens of bankers and traders - including one UBS employee - accused of fraud on the foreign exchange currency market.