Former Trust Company Officials Arrested In Late Trading Fraud
New York Attorney General Spitzer today announced felony charges against three senior executives of Security Trust Co. N.A., a Phoenix, Arizona-based company that processes mutual fund trade orders for pension plans and retirement systems.
The officials, including the former chief executive officer the company, are accused of assisting the illegal late trading of mutual funds. The defendants' actions resulted in larceny of more than $1 million.
In related actions, the Securities and Exchange Commission filed civil charges against the executives and the firm, and the U.S. Treasury Department's Office of the Comptroller of Currency announced an enforcement action that will result in the dissolution of the firm.
"Pervasive misconduct must be met with appropriate sanctions," Spitzer said. "In this case, 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's criminal case against the three executives and related civil actions by federal regulators are the latest developments in a widening investigation of illegal trading practices in the mutual fund industry. The case marks the first time regulators have addressed illegal conduct by third parties or intermediaries in mutual fund trading. Previous cases have been against either hedge funds or mutual funds.
Spitzer's complaint charges that the defendants were middlemen in an illegal late trading scheme involving certain hedge funds.
The defendants processed the late trades by the hedge funds as if they were timely trades. They did this by "disguising" the illegal trades as orders from one of their many client pension plans. This deceived the mutual funds into making the trades.
Late trading is prohibited by New York law and SEC regulations because it allows a favored investor to take advantage of post-market-closing events not reflected in the share price set at the close of the market.
Spitzer's criminal complaint charges former Chief Executive Officer Grant D. Seeger, former President William A. Kenyon and former Senior Vice President of Corporate Services Nicole McDermott, with grand larceny, falsifying business records and securities fraud under the state's Martin Act. Each count is a felony charge.
The specific criminal charges against Seeger, Kenyon and McDermott are as follows: Grand Larceny in the First Degree, in violation of Penal Law §155.42, a Class B Felony (Six Counts); a Violation of the General Business Law § 352-c (5), a Class E Felony; a Violation of General Business Law § 352-c (6), a Class E Felony (Four Counts); Scheme to Defraud in the First Degree, in violation of Penal Law § 190.65(1)(A), a Class E Felony; and Falsifying Business Records in the First Degree, in violation of Penal Law § 175.10, a Class E Felony (two counts).
The maximum permissible sentence upon a conviction for each of the most serious charges, six counts of Grand Larceny in the First Degree, is 8 1/3 to 25 years imprisonment.
The criminal charges, filed today in Manhattan, are merely accusations, and the defendants are presumed innocent until and unless proven guilty.
Security Trust Co. administers $13 billion in assets for 2,300 different pension plans and retirement systems.
The criminal case is being prosecuted by Assistant Attorneys General Ricardo Velez and Harold Wilson under the direction of Criminal Prosecutions Bureau Chief Janet Cohn. Investigator Herbert Antomez also worked on the case.
Spitzer thanked the OCC, SEC and U.S. Labor Department for their assistance on the case. He commended the OCC, the primary regulator of banks and trust companies, for moving quickly to close down the company while at the same time safeguarding the interests of pensioners and other institutional clients.
Attachments: download Adobe Reader from Adobe Systems.