A former trader at Canadian Imperial Bank of Commerce has been charged with larceny and securities fraud, accused of financing illegal mutual fund trades.
The trader, Paul Flynn, of Larchmont, New York, is the latest in a growing list of Wall Street traders to face charges by the New York State attorney general, Eliot Spitzer, as part of a continuing investigation into mutual fund trading.
The criminal charge was announced jointly Tuesday with a civil enforcement action by the Securities and Exchange Commission. The SEC is seeking a fine and disgorgement of profits and possibly a permanent ban from the industry for Flynn.
As the investigation into fund trading widened, meanwhile, two mutual fund companies said that they had set aside money to cover legal and restitution costs. Federated Investors said it would pay $7.6 million to compensate shareholders for improper trades. Another company, Amvescap, said it would take a charge to cover the cost of regulators’ inquiries into its Invesco Funds and AIM Investments divisions.
The actions against Flynn are the first by regulators related to financings by banks of mutual fund trades made by hedge funds. The SEC and Spitzer’s office acknowledged last month that they were looking at banks’ roles in such trades.
Spitzer said in an interview that the case against Flynn was the first of several to result from the inquiry into the financing of illegal mutual fund trades.
According to the attorney general, Flynn, 46, financed trades on behalf of two hedge funds, Canary Capital Partners and Samaritan Asset Management, that were completed after the market had closed but at an earlier price. The practice, known as late-day trading, is illegal.
People briefed on the investigation previously said that Flynn and other executives at CIBC had arranged more than $1 billion in financing for trades in mutual funds by hedge funds. The financings were arranged from 2002 to 2003, the SEC said.
The hedge funds’ trades went through Security Trust, an intermediary in the processing of mutual fund trades. Security Trust, which was shut down by federal regulators in November, handled hundreds of illegal trades by Canary Capital, regulators said.
Flynn, a managing director in the bank’s New York office, was aware that Security Trust was processing the trades after hours, the SEC and the attorney general said on Tuesday. Flynn was asked to leave CIBC in December.
An internal memorandum written by Flynn in October 2001 described various ways that Security Trust had concealed illegal trades made by the hedge funds that CIBC financed. These included disguising the orders as being made by retirement or pension plans, or setting up multiple accounts on behalf of each hedge fund, according to excerpts from the memo quoted by both the commission and Spitzer. A spokesman for Stern declined to comment. A representative of Samaritan did not return calls. A representative of Security Trust said he could not comment because he had not seen the regulators’ filings.
Flynn, who was arrested Tuesday morning, did not return calls, and his lawyer, David Gendelman, declined to comment. Flynn pleaded not guilty in New York City Criminal Court, and bail was set at $750,000. A spokesman for CIBC said the company was continuing to cooperate with regulators but declined to comment further.
