<blockquote> At the age of 80, Marion Friedman accused her nephew Grant Seeger of losing much of her $479,000 nest egg in undeveloped land in the Arizona desert, fraudulent oil-and-gaspartnerships and risky Mexican securities. And so Friedman hauled Seeger before a securities arbitration panel in Minneapolis in June 2001.</blockquote>

Three days into the courtlike proceeding, Friedman — who was going blind and hobbled by a broken knee — signaled she’d had enough. The confrontation had embittered her family. ”I told Grant, ‘I can’t do this anymore. Can we settle this right now?’ ” recounts Friedman, now 82.

Seeger denied his aunt’s claims and did not reimburse her $149,159 in alleged losses. But he ended the dispute by paying her attorney’s fees. Now, Seeger, 41, and his company, Security Trust, are emerging as central figures in a larger Wall Street trading scandal that is rocking the $7 trillion mutual fund industry.

Last month, New York Attorney General Eliot Spitzer implicated Security Trust in a blockbuster scheme of illegal after-hours trading by hedge fund Canary Capital Management. Security Trust allegedly helped Canary’s manager Edward Stern — the scion of a New York billionaire family — selectively buy and sell shares in some of the USA’s best-known mutual fund companies up to 9 p.m. ET, five hours after markets closed. By taking unfair advantage of whipsawing markets, Stern allegedly skimmed profits that belonged to small and long-term investors. Spitzer likened the practice to ”betting today on yesterday’s horse races.”

Stern and Canary settled their part of the criminal investigation by paying the state $40 million. Security Trust and its CEO deny wrongdoing and have not been charged. Most of the largest mutual fund families, including Fidelity and Vanguard, continue to do business with the company.

But the New York criminal complaint raises important questions about how well mutual funds have been regulated and even how trusting America’s largest fund families have been in forging relationships with little scrutinized investment intermediaries such as retirement plan administrators, trust banks and transfer agents.

The New York complaint also is only the latest in a startling history of legal problems besetting Security Trust, the USA’s largest independent trust and custody company, which administers $13 billion in investment assets in 401(k) plans, pensions and individual retirement accounts. Security Trust safeguards 2,500 retirement plans that encompass about 750,000 individual participants and is adding 150 retirement plans a month, says Nancy Murphy, company vice president.

Yet state and federal court records show Security Trust’s CEO and companies affiliated with him have been sued more than a dozen times for fraud, negligence, breach of fiduciary duty and other claims. ”He told me his very own aunt was the only one who ever sued him,” says the elderly Friedman.

In addition, the Arizona State Banking Department censured Security Trust three times in the 1990s for illegal self-dealing, improperly directing retirement accounts into high-risk investments and engaging ”in a pattern of misrepresentation and concealment.”

In a 1998 cease-and-desist order against the company, state banking superintendent Richard Houseworth excoriated Seeger personally for misleading a state examiner and making ”untrue” statements to disguise the extent to which his trust company referred its clients to his own high-risk investments.

Now, the Justice Department and Securities and Exchange Commission have joined Spitzer in scrutinizing suspect trading practices in the insular mutual fund world. They vow to toughen their oversight of fund families that serve as safe harbors for small, unsophisticated investors and the rapacious hedge funds that serve the wealthy. Tougher oversight is likely to extend to Security Trust’s vast but little-understood business of trust banking where it has carved out a sizable niche.

Barry Barbash, the SEC’s former top mutual fund regulator, says, ”From a regulatory perspective, the black hole in mutual fund distribution is at the intermediary level. These include pension-plan consultants, plan administrators and custodians. I don’t think the SEC has focused much on that level.” Indeed, the New York attorney general says Stern and Canary Capital employed several intermediaries to effect its illegal trading practices, including Bank of America, JB Oxford and Kaplan.

Next week, Security Trust promises to release the results of an internal probe into how it allegedly helped Canary Capital ”time” the mutual fund market — a legal but controversial practice of profiting from market-moving information — and how its electronic trading platform may have been used for illegal after-hours trades. In marketing materials, Security Trust cites a trading relationship with more than 5,200 individual mutual funds, including all of the fund families Canary was accused of trading: Bank of America’s Nations Funds, Bank One’s One Group, Janus Capital Group and Strong Capital Management.

Seeger declined to comment for this story. In a Sept. 10 letter to clients, he said Canary Capital had given ”written assurance” to Security Trust that its trading decisions were completed before the market closed.

”As you know,” Seeger wrote, ”a trust company’s role in late-day trading involves the processing of trades after (the) close of market (but) the decisions on all trades are made prior to market close.” Indeed, behind the scenes of the big stock exchanges, mutual fund transfer agents and custodians such as Security Trust process trading paperwork 22 hours a day.

Seeger’s letter added that an initial internal review at his company found the controversial mutual fund trades executed on Canary’s behalf ”had no direct adverse effect upon any other client.” And Seeger promised to ”cooperate fully with the regulators.”

Last week, Seeger was pitching his company’s services to retirement plan administrators in Portland, Ore. ”For us, it’s business as usual right now,” Murphy says.

<B>A way with words

</B>After 20 years in Arizona, Seeger is a fixture among its wealthy elite. Well-dressed and well-mannered, he amassed a fortune while playing golf with physician investors during the day and giving persuasive sales talks to rich retirees at night. A former secretary recalls him as a curly-haired Adonis.

But Seeger grew up on the plains in Grand Forks, N.D., where his grandfather, the son of a Russian immigrant, fashioned a living as a furrier. Many people remember Seeger and his former partner, Hayden Holland, as raw recruits when they graduated together from Arizona State University in 1984.

Broker records maintained by the NASD show the two men barely passed securities-licensing examinations in November 1984. Each scored 3 points above the minimum on a 100-point scale. Holland failed two subsequent examinations for additional licenses, NASD records show.

In a brief recorded telephone message, Holland said, ”I’ve not been involved with Security Trust for a very long time.” He said he had nothing to do with the present controversy.

The men became insurance salesmen at Mutual of New York, where Holland initially showed up in a T-shirt and shorts, says a secretary who remembers him. They came under the tutelage of bankrupt stock promoter Hugo Ribadeneira, who was convicted of multiple criminal counts of securities fraud in 1990 related to prior ventures in Kansas. The trio formed their own business, Abacus Financial Consultants.

”We started selling, selling, selling. It was doing very well,” Ribadeneira said. Among investments the men peddled, according to court complaints, were hundreds of acres of desert land ”flipped” among a close circle of sellers and buyers to inflate the asset’s value before it was marketed to investors.

According to the court complaints, Seeger and Holland packaged one investment by purchasing 40 acres of undeveloped land near Bullhead City, Ariz., for $350,000 and selling it to investors for $1.1 million without any supporting appraisal. One-quarter of that land, known as the Hospital Parkway Limited Partnership, was a flood zone, court records say.

”It was a big ditch,” says Diane Bennett, 73, a widowed retiree who invested $90,242 in the ill-fated Hospital Parkway partnership and another disastrous desert venture also promoted by Seeger and Holland. Twice she sued the men and Security Trust. Recently, she settled the contested lawsuits for a fraction of her investment. ”What it all boiled down to is they never should have put a widowed woman on a fixed income into a very speculative-type investment,” Bennett said in an interview.

Ribadeneira, chastened by his own legal problems, says he parted company with Seeger and Holland due to his own reservations. Lawsuits and regulatory orders subsequently raised concerns about title on the real estate and conflicts of interest among the investment’s promoters. Ribadeneira says that, in his opinion, ”What I did not like about it is they were not disclosing everything they should.”

In time, Seeger and Holland’s interest in more exotic financial strategies — which they referred to as ”asset preservation” in marketing materials circulated to senior citizens and physicians — led them into the trust business. In October 1991, they created Security Investment Management & Trust, which combined securities retailing with highly confidential custodial accounts, including offshore trusts. The Arizona State Banking Department regulated the company, which was a direct predecessor of Security Trust.

Security Investment made a specialty of handling unconventional investments ranging from unlicensed annuities from the offshore tax haven Isle of Man to self-directed IRAs that participated in delinquent debt collections, according to company promotional materials and regulatory records.

Investors such as Seeger’s aunt, who kept her savings in a ”discretionary” account at Security Investment, soon saw her portfolio remade from a blue-chip account to include thinly capitalized ventures in which Seeger and Holland had personal interests, court complaints and regulatory records show. Security Investment defined ”discretionary” accounts as those it could invest on customers’ behalf. Many investments exacted high fees and commissions and could not be easily sold, regulatory records show.

In August 1995, the Arizona State Banking Department appointed a special examiner to comb through Security Investment’s records. Finding the trust had misplaced clients’ funds and failed to maintain its regulatory minimum capital, the department issued a cease-and-desist order that admonished the company for the shortcomings and for failing to disclose its principals’ self-dealings.

<B>Divorce dispute centers on records

</B>At the time, Seeger’s first wife, Jane De Witt Seeger, now Jane Viselli, was suing for divorce in a court action that alleged he had hidden the couple’s financial assets. The proceedings went on for more than half a decade, in part, her lawyer, James Ehinger, argued in court filings, because ”nearly every disclosure” made by Grant Seeger was ”materially false.”

For example, Ehinger quoted Grant Seeger’s court affidavits in which Seeger claimed income of only $25,000 in 1991, no income in 1992 and said he had ”no information with regard to his income for 1993” because he ”has no personal financial records of any kind.” The attorney said subpoenaed copies of Grant Seeger’s tax records showed his income averaged $90,000 a year during that time — 3 1/2 times the amount disclosed in his affidavit — and subpoenaed bank records show he deposited $162,179 into his personal accounts in 1994.

In a letter to Grant Seeger’s attorney, Ehinger said, ”This leaves us not only with the question of how much money Grant was actually making, but also the question of where that money was coming from, since it does not appear to have come from the business enterprises he has disclosed to us.”

Jane Viselli said the squabbling came to naught. ”Everything was so hidden, and so complicated, I never found out anything about the company,” she said in an interview. The court awarded her $3,056 a month in alimony. Both individuals have since remarried.

Security Investment, renamed Security Trust in 1996, did not contest the state’s cease-and-desist orders nor did it correct many of the alleged violations, according to follow-up state investigations.

The state banking department revisited Security Trust in March 1998, prompted by repeated complaints by Phoenix physician Gary Rada and his wife, Gayle. The Radas filed a fraud and racketeering lawsuit against Seeger, Holland and Security Trust two months later, saying they lost more than $250,000 in ”grossly unsuitable and risky investments” at the company over seven years. Security Trust defended itself, but Gayle Rada says the company settled for about $200,000, equal to their attorney’s fees.

In court filings at the time, Gary Rada said the extent of the self-dealing by Seeger and Holland was made clear to him by a longtime patient, Betty Cummins, who was a secretary for the two executives at the trust company in the early 1990s and came into his office one day while still employed there.

According to Rada’s deposition, filed as an exhibit in the lawsuit, Cummins said Seeger ordered her to falsify the investment returns in quarterly reports mailed to investors. ”She said that one time she was filling out this <B> . . . </B> quarterly report and it came back to an (investment gain) of about 3%. <B> . . . </B> (S)he told me it was Seeger who said, ‘We’re making more money than that, change it to 12% or 15%.’ ”

In an interview, Cummins stood by Rada’s remarks. ”That was the start of my discontent. I hated that job,” she says, adding that eventually, ”I was asked to leave.”

The state banking department investigated Rada’s complaints and found Security Trust and its principals had violated the previous cease-and-desist order by continuing to act in ”an unsafe and unsound manner.” Among the state’s growing list of complaints, it said Security Trust offered clients one investment, Bel-Air International Income Trust, which shared the characteristics of a Ponzi scheme. As in a classic Ponzi scheme, the dividends Bel-Air paid investors ”constituted either a return of the investors’ capital or other investors’ monies,” the state said.

The state also found that Security Trust president Holland controlled about $2.3 million in Bel-Air deposits through his own company, SHYS Inc. And the state complained that Security Trust had promised but failed to recover those funds for its clients, regulatory records show.

As a result of the investigation, state banking superintendent Houseworth issued his second of three cease-and-desist orders against the company. This one ordered Security Trust to stop moving clients’ funds into investments controlled by its principals and to solicit no new clients without the state’s consent. Holland resigned shortly afterward. That’s when the company shifted its emphasis from selling investments to its present business of serving as an independent financial custodian.

Today, Security Trust often tells prospective customers that its problems stopped with Holland’s departure. But in a February 1999 cease-and-desist order, Houseworth hammered Security Trust again, accusing the company of failing to maintain ”adequate records,” failing to determine ”the suitability and fairness” of certain transactions and failing even to establish a ”market value” for customers’ investments.

Houseworth said if a client complained, Security Trust shifted the illiquid asset to another discretionary account, without that customer’s knowledge or consent.

In June 1999, Seeger’s aunt, Marion Friedman, filed her arbitration claim. According to NASD files, Friedman said her nephew had ”engaged in a series of unsuitable securities transactions and benefited in some as a controlling person.” She also accused him of making unauthorized trades and ”churning” the account: trading to increase his commissions.

Seeger fought his aunt in federal court in Arizona, arguing he personally had not sold any securities to her and that Security Trust’s investment committee had made all the investment decisions.

In another lawsuit at the same time, filed by Phoenix physician Mark Baldree against Seeger and Security Trust — covering many of the investments Friedman owned — Security Trust’s lawyer acknowledged the company had been unable to produce minutes of its investment committee meetings.

Seeger’s aunt defended her claim in federal court by submitting a letter her nephew wrote to her in August 1992 stating, ”At this stage in your life you should not expose yourself to risk but concentrate on preservation of capital and the generation of a prudent level of income.” Seeger was persuasive.

By Sept. 18, 1992, the recent widow transferred $479,445 into a trust account controlled by Seeger’s company, according to a copy of her account statement attached to the NASD claim. Yet when Friedman received her statement two weeks later, on Sept. 30, 1992, her portfolio already was valued at 17% less after $85,000 in unspecified ”withdrawals” and losses, the statement shows.

”There would be no way I would take out $85,000,” Friedman says now. With her entire savings in a discretionary account, Friedman’s portfolio at Security Trust soon came to be dominated by partnerships in which Seeger and Holland had personal interests, according to a Security Trust accounting of her investments and a ”conflict” disclosure the state banking department ordered the company to mail to investors in August 1995.

Friedman’s money also was invested in Mexican government bonds months before the country devalued its currency in December 1995, resulting in an immediate 60% loss in principal, according to Security Trust records included in the federal lawsuit.

And Friedman was invested heavily in an oil-and-gas partnership known as Penneco Production that was 28% owned by Seeger and Holland. As that partnership teetered near collapse in March 1998, Security Trust transferred $20,000 in cash from Friedman’s trust account to Penneco for non-interest-bearing IOUs to be repaid five years later, company records show. The partnership subsequently went broke.

<B>Trust business grows

</B>Over time, Seeger and Security Trust distanced themselves from their decade of disastrous investments. As the late 1990s bull market raged and investment professionals sought professional custodians to safeguard retirement assets, the trust business doubled in size almost every year, according to company materials. In 1999, Seeger sold a 51% stake in the private company to an investment partnership.

In January, Security Trust successfully petitioned the federal Office of the Comptroller of the Currency, a bank regulatory agency in the U.S. Treasury, to switch its charter from a state trust to a national bank.

An OCC spokesman declined to comment for this story except to say bank inspectors were examining Security Trust as part of a normal review.

Meanwhile, Security Trust co-founder Holland returned to selling investments that state authorities say were improper. In April, the Arizona Corporation Commission censured him for his role as a salesman in a $14 million Ponzi scheme that involved the sale of discounted accounts receivable.

Holland was ordered by the state to repay investors $3.4 million after authorities found the receivables were backed by no assets. ”We didn’t find any records that would support any of the factored receivables,” says Jack Larsen, court-appointed receiver in the case.

Holland does not dispute the state order but says, ”It’s just unfortunately associating with the wrong people.”

Security Trust acknowledged in court papers that it served as the custodian for some of the bogus investments but said it is not responsible for the fraud.

By this time, Security Trust’s relationship with New York hedge fund Canary Capital was in full swing, the New York attorney general’s complaint states. Prosecutors say representatives from the two companies met in May 2000 ”to see if (Canary) could use the STC electronic platform” to engage in market timing and illegal after-hours trading of mutual funds.

Prosecutors say Security Trust and Canary made an agreement by which Security Trust would help ”camouflage” Canary’s fund trades by processing them with large orders from other trust accounts. The complaint says, ”This allowed Canary to piggyback onto the retirement funds’ trade flows in such a way that the targeted mutual fund families would not notice Canary’s timing.” In return, Security Trust demanded fees equal to 1% of Canary’s traded assets — ”10 times what legitimate customers paid,” the complaint states — plus profit-sharing fees equal to 4% of its gains.

The New York attorney general’s office declined to comment, beyond saying it was continuing its probe into companies that may be linked to Canary and beyond Canary.

Some Security Trust business partners and clients aren’t waiting for the outcome of the state and federal probes, however. Jeff Miller, CEO of GoldK, a Waltham, Mass., record keeper for investment plan administrators, said in an interview, ”From what we gather, serious accusations and investigations are going on. <B> . . . </B> What that means (to us) is we’re not placing new business with STC.”

Investor advocate Mercer Bullard, a former assistant counsel of the SEC’s division of investment management and now the head of grass-roots group Fund Democracy, warns, ”This is going to be a twice-bitten case.” If Security Trust has been the subject of fraud charges in the past, Bullard says, retirement-plan administrators who employ it now could be liable for exposing investors to losses in the present situation. ”In my opinion,” Bullard says, ”if the allegations are correct, there is no fiduciary who is responsible who is leaving its money with that company.”