Nov. 9–For decades, the Stern family name has signified fabulous wealth, extensive real estate developments, and the transformation of neglected industrial wasteland into gold on the Jersey Citywaterfront and in the Meadowlands.

Through their Secaucus-based development arm, Hartz Mountain Industries, the Sterns — led by patriarch Leonard N. Stern — have fostered a reputation on both sides of the Hudson River as aggressive builders of offices, hotels, housing, warehouses, and more.

But that reputation was tarnished by Edward Stern, one of Leonard’s sons, whose $40 million settlement with New York State Attorney General Elliot Spitzer in September opened the floodgates of the growing mutual-fund scandal. And although Stern admitted no guilt in the deal, the 38-year-old hedge fund operator now faces a slew of lawsuits by mutual fund investors who say Stern’s profits were at their expense.

More than a half-dozen suits mirror Spitzer’s Sept. 3 complaint accusing Stern and his two Secaucus-based companies, Canary Capital Partners Ltd. and Canary Investment Management LLC, of engaging in fraudulent practices that rewarded the companies with “tens of millions of dollars at the expense of mutual-fund investors” between 1999 and 2002.

The suits, some of which were filed in U.S. District Court in Newark, accuse Stern of trading illegally or improperly in funds such as Janus Investment Fund, Strong Growth Fund, and a variety of One Group and the Nations’ funds.

The funds knew of Stern’s activities and aided and abetted them, the suits say.

One of the suits illuminates Stern’s high-flying success in the face of the recession: The two Canary companies’ assets rose from $184 million at the start of 2000 to $730 million two years later, it says, even as the S&P 500 declined by 13 percent.

Stern gained notoriety because his settlement marked the first major public sign of the now-mushrooming probe, said Ernest Badway, a Newark securities attorney and former Securities and Exchange Commission lawyer.

“He has become the poster child for everything bad in the fund industry,” Badway said. “And he is not somebody who is going to engender an awful lot of sympathy.” Under the settlement with Spitzer, Stern agreed to cooperate with the attorney general’s investigation, which has since broadened to ensnare some of the largest mutual-fund companies.

Less than two weeks after Stern’s settlement, a Bank of America broker — Theodore C. Sihpol III, who helped Canary set up a mutual-trading account with the bank — was charged with larceny and securities fraud, based on Stern’s testimony.

Meanwhile, a number of large mutual-fund companies — including Strong, Prudential, and Putnam — are under fire from state and federal regulators for allowing investors and in some cases their own employees to engage in the types of trading practices allegedly used by Stern.

In one tactic, called “late trading” — which is illegal — several mutual funds permitted Stern to trade funds after the markets closed, Spitzer alleged. In that manner, if post-market information came out that would push share prices up, Stern could buy shares at the old closing price and sell them at the higher price the next day, Spitzer alleged.

Spitzer said that Stern used a strategy called “timing,” a form of arbitrage in which traders buy and sell quickly, exploiting the fact that funds set their prices only once a day at the conclusion of trading.

“The profits that were made were profits that were made at the expense of the funds,” said Richard Brualdi, a New York attorney whose client, Robert Corwin of Port Chester, N.Y., filed one of the suits. “Al of the profit is profit that properly belonged to Mr. Corwin and the funds’ other shareholders.” Stern declined to comment for this article.

Stern, in his settlement with Spitzer, agreed to pay a $10 million penalty, which will go into New York State coffers, and restitution of $30 million, said Spitzer’s spokesman, Brad Maione.

The case has cast the spotlight on perhaps the quietest member of an empire started when Edward Stern’s German grandfather, Max, emigrated to the United States in 1926 with 5,000 singing canaries.

Stern sold the birds and then began selling birdseed. His son, Leonard, joined the business in 1959, helping move the company into real estate. It now owns 35 million square feet of property in 200 buildings, adding to the portfolio last weekend with the $24 million purchase of Exchange Place on the Jersey City waterfront.

As a result of his success, Leonard Stern is one of the 200 richest people in the nation with wealth of $2.2 billion in October, according to Forbes magazine.

In New Jersey, Edward’s brother, Emanuel, 40, is the most prominent of the Stern offspring, heading Hartz Mountain Industries. As Hartz’s president, he is known as a vocal, aggressive presence who fights vigorously for his projects.

In contrast, Edward — who lives in New York City with his wife and two children — keeps a far lower profile. He attended Haverford (Pa.) College, graduating with a degree in art history. Stern later worked as a writer for the satirical magazine Spy and subsequently was a manager at the Village Voice, which was at the time owned by Leonard Stern.

In 1989, Edward Stern joined the pet business, Hartz Mountain Corp. He became president in 1997, overseeing its sale in 2000, the company Web site says.

Around the same time, Edward Stern — whose two companies are located at the same address as Hartz Mountain Industries — moved into investing in hedge funds run by others and trading mutual funds, the Spitzer complaint alleges.

The money for the trades came from Canary Capital Partners, a multimillion-dollar hedge fund that invested in mutual funds, according to Spitzer. Hedge funds, which are largely unregulated, are private investment partnerships that pool large amounts of money from investors seeking quick profits.

Stern’s second company, Canary Investment Management, managed the hedge funds’ assets, Spitzer said. By July 2003, he said, the company had earned $40 million from the partnership.

The complaint offers a graphic glimpse into how closely Stern and the mutual funds allegedly worked together on the illicit trading.

Under Sihpol’s guidance, for instance, Bank of America installed a special “state of the art electronic late trading platform” in Canary’s offices, the complaint alleged. The bank allowed the company to trade between 4 p.m. and 6:30 p.m., when markets were closed, in hundreds of bank funds, even giving Canary a $300 million line of credit, the Spitzer complaint alleged.

“In return, Canary agreed to leave millions of dollars in Bank of America on a long-term basis,” the complaint alleges.

But it is clear from documents filed with the SEC that Sihpol knew how valuable his client was.

An April 2001 memo e-mailed by Sihpol — the recipient’s name has been redacted — notes that Canary had $100 million “sitting in cash” after the sale of the pet company. The memo stated that the Sterns’ net worth was $3 billion, calling them the “11th richest family in N.Y.C.” Moreover, Sihpol clearly understood Stern’s investment plan, the memo shows. Canary’s objective, he wrote, was to implement “their proprietary market-timing trading strategy.” Spitzer said Canary stopped trading mutual funds in July.

Two months earlier, Stern had written to Canary investors informing them that in light of declining returns and reduced capacity to “do our most reliable trades,” he was returning capital to all shareholders who were not principals, associates, or family members.

“We hope that you considered the ride to be a good one,” Stern wrote, “and thank you again for your support.”

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