New York Ag And Sec Bring Criminal And Civil Actions Against Mutual Fund Executive
New York State Attorney General Spitzer and the Securities and Exchange Commission today announced the arrest, conviction, and lifetime industry bar of James P. Connelly, Jr., former Vice Chairman and Chief Mutual Fund Officer of Fred Alger & Company, Inc., a prominent mutual fund firm.
Connelly pled guilty to the crime of Tampering with Physical Evidence, a class E felony punishable by up to four years in state prison. The charges against Connelly stem from his repeated tampering with an ongoing investigation of illegal trading practices in the mutual funds industry.
In its administrative order, the SEC found that Connelly approved agreements that permitted select investors to "time" certain mutual funds managed by Alger, a practice that violates an adviser's fiduciary duties and adversely affects the value of the fund being timed. In this case, the timing arrangements were also inconsistent with Alger's public disclosures in prospectuses and statements of additional information filed with the SEC. Connelly is the first fund executive charged for permitting market timing.
"The scope of the investigation into illegal trading practices in the mutual fund industry continues to expand," Spitzer said. "Any obstruction of this investigation will be dealt with swiftly."
Stephen Cutler, Director of the SEC Division of Enforcement, said: "By approving timing arrangements with select investors, Mr. Connelly put his own firm's bottom line ahead of the interests of the fund shareholders he was entrusted to protect. Such conduct is a fundamental breach of an investment adviser's fiduciary duties and warrants tough sanctions. Accordingly, we have sought and obtained from Mr. Connelly a lifetime bar from the securities industry as well as a significant monetary penalty."
According to the felony complaint, Connelly took a series of steps to thwart the investigation. Beginning October 3, 2003, Connelly began deceiving his own firm's lawyers to prevent them from identifying and producing documents responsive to a subpoena from the Attorney General's office. Specifically, Connelly tried to conceal trading arrangements between his firm and Veras Investment Partners, LLP, a Texas hedge fund company.
The illegal conduct alleged in the complaint began September 3rd, following the Attorney General's announcement of a settlement and cooperation agreement with Canary Capital Partners and an expanding investigation.
The next day, Connelly directed subordinates to delete e-mails called for by the subpoena. Later, he coached them to falsely report facts relevant to the investigation and his own culpability.
Connelly admitted his conduct under oath before the Hon. James Yates in Part 31 of the Supreme Court of New York State at 100 Centre Street in Manhattan. New York's statute outlawing tampering with evidence calls for a maximum sentence of four years in state prison.
Judge Yates is expected to sentence Connelly on December 17, 2003. The guilty plea resolves all charges for Connelly in connection with the investigation.
According to the SEC order, Connelly was involved in timing arrangements from the mid-1990s until 2003. By early 2003, Connelly was requiring that investors seeking timing capacity agree to maintain at least 20 percent of their investment at the firm in buy-and-hold positions, sometimes referred to as "sticky assets."
In settling this matter, Connelly neither admitted nor denied the SEC findings. The Commission's order directs Connelly to cease and desist from future violations of various provisions of the federal securities laws; bars him from association with any broker, dealer or investment adviser; bars him from serving in various capacities with respect to any registered investment company; and imposes a $400,000 civil penalty.
Connelly's former employer, Alger, reported allegations of tampering to the Attorney General's office late last week, and cooperated fully in the investigation that culminated in today's charges and guilty plea.
The investigation was handled in the Attorney General's office by Assistant Attorneys General Kevin Suttlehan, Felice Sontoupe, Michele Maerov, Harold Wilson, Maria Filipakis and Charles Caliendo, and Investigator John McManus, under the direction of Criminal Division Bureau Chief Janet Cohn and Deputy Attorney General Peter Pope.
The SEC's civil investigation is being overseen by Northeast Regional Director Wayne Carlin and Associate Regional Director Mark Schonfeld.
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