NEW YORK (AP) – A former executive of the Canadian Imperial Bank of Commerce was arrested and arraigned Tuesday on charges of arranging financing for an improper trading scheme that stole more than$2 million from two mutual funds.
Paul A. Flynn, who was once the managing director of equity investments for CIBC, was arrested at his home in Larchmont, N.Y., the state attorney general’s office said. He was charged with first-degree grand larceny, violating the state’s general business law, and with scheming to defraud. If convicted of grand larceny, Flynn faces up to 25 years in prison.
At Flynn’s arraignment, Manhattan Criminal Court Judge Larry Stephen set bond at $750,000, secured by $75,000 cash. Flynn did not enter a plea and his lawyer had no comment.
Flynn was also charged simultaneously with civil fraud by the Securities and Exchange Commission, which said it would seek penalties including a lifetime ban on him working in the industry.
A message seeking comment from CIBC was not immediately returned. Flynn, who worked in CIBC’s midtown Manhattan offices, was fired from his job in December 2003.
Flynn is the latest fund company executive to face charges in the mutual fund trading scandal that has rapidly spread across the $7 trillion industry. Authorities have also accused employees of Pilgrim Baxter, Fred Alger & Co., and Invesco Funds Group, among others, of wrongdoing.
Prosecutors said Flynn, 46, used his position at CIBC to arrange financing for illegal late trading and deceptive market timing of mutual funds by two client hedge funds, Samaritan Asset Management and Canary Capital Partners. Canary made headlines last year when it agreed to a $40 million settlement to resolve charges of improper fund trading brought by New York Attorney General Eliot Spitzer.
Market timing is a type of quick, in-and-out trading that is restricted by most funds because it tends to skim profits from shareholders. Late trading refers to the illegal practice of allowing trades that come in after 4 p.m. Eastern time, when funds are priced, to receive that day’s price.
The trades which Flynn allegedly facilitated were placed through an intermediary, Security Trust Company, a trading services company that disguised the orders as coming from retirement and pension plans, prosecutors said. They said the disguised orders hid the identity of the real traders and kept the mutual funds from enforcing their anti-timing rules.
Prosecutors said funds that were illegally traded using Flynn’s financing included Massachusetts Financial Services’ Emerging Growth Fund and Artisan International Fund. They said the illegal trades occurred from January 2001 to September 2003.
Authorities previously had charged three former STC executives with helping arrange late trades, and ordered the trust closed because of fund trading abuses. MFS Investment Management is believed to be negotiating with regulators to settle allegations of improper trading of its funds.
Flynn’s lawyer, David H. Gendelman, refused to comment outside court, but he said during the arraignment his client might want to testify before the grand jury. Assistant Attorney General Harold Wilson responded that Flynn in that case should come to his office on Feb. 11.
The judge scheduled Flynn’s next court date for March 10.
