A former executive at Canadian Imperial Bank of Commerce was arrested Tuesday and faces criminal and civil charges by U.S. regulators in an illegal mutual fund trading scheme.
New York Attorney General Eliot Spitzer’s office arrested Paul Flynn, a former managing director of equity investments at CIBC, near his home in Larchmont, N.Y. Flynn, 46, pleaded not guilty.
In a related action, the Securities and Exchange Commission filed an enforcement action against Flynn, accusing him of civil fraud for allegedly financing the mutual fund trading irregularities.
This is the first time that regulators have targeted someone who they say arranged financing so that late traders and market timers could conduct illegal activities. ”This prosecution sends the message that those who arrange funding for illegal trading will be held accountable,” Spitzer says.
Spitzer charged Flynn with five felonies, including two counts of grand larceny. If convicted, he faces up to 25 years. His attorneys did not return calls for comment.
From 2001 to 2003 Flynn allegedly helped CIBC hedge fund clients, including Canary Capital Partners, to engage in late trading and market timing, the SEC says. Spitzer’s probe into Canary Capital first touched off the mutual fund trading scandal last September.
Market timing involves frequent trading, often in international funds, to exploit ”stale” prices due to time differences. It is legal but might violate fund rules.
Late trading is the illegal practice of buying and selling funds after the 4 p.m. ET market close but getting the 4 p.m. price.
CIBC’s hedge fund clients placed mutual fund trades through Security Trust Co., which disguised them as retirement plan trades, Spitzer’s office claims. That allowed them to thwart anti-timing rules and engage in late trading.
In November, the SEC accused STC and three former executives of civil fraud. And Spitzer’s office filed criminal charges against the executives. One later pleaded guilty to violating New York securities law.
Among the funds officials say were illegally traded using Flynn’s financing was Massachusetts Financial Services’ Emerging Growth fund. MFS is in settlement talks with Spitzer about accusations of trading abuses.
