New York’s top securities cop accused four big mutual fund firms yesterday of participating in illegal trading schemes to hand fund shares to certain traders at prices notavailable to most investors.
Though New York Attorney General Eliot Spitzer didn’t name any Boston-based fund firms, similar charges could arise here.
Secretary of State William Galvin’s staff is probing whether brokers at a Prudential Securities office in Boston illegally took advantage of market timing schemes to reap profits, a source in Galvin’s office told the Herald.
Galvin declined to confirm yesterday whether Prudential’s brokerage office is among those being scrutinized by his office.
But Galvin said he is determined to discover whether financial companies with large operations in the state engaged in the schemes alleged by Spitzer yesterday.
“It’s playing by two sets of rules,” Galvin said. “You are saying there’s a set of rules for the insiders who can make a quick profit, (while) the average investor is disadvantaged. It’s clearly not fair play.”
Spitzer is investigating fund groups owned by Bank of America Corp., Bank One Corp., Janus Capital Group Inc. and Strong Capital Management Inc.
Spitzer hasn’t yet filed any charges, but he said yesterday that he reached a $40 million settlement with hedge fund Canary Capital Partners.
Canary Capital issued a statement saying it didn’t admit to any wrongdoing, and settled the case to avoid a prolonged legal fight. The four fund companies named by Spitzer each said they’re cooperating with his investigation.
Spitzer’s case focuses on practices known as “late trading” and “market timing” of fund shares. Spitzer’s charges that Canary Capital participated in both trading methods by making secret deals with fund firms mark “day one” of his probe, Spitzer said.
Late trading involves a trader buying shares after the market closes at 4 p.m. for the fund’s closing price that day – instead of the trade being processed at the fund’s next-day price, as is the case for most investors. Through late trading, buyers can illegally take advantage of news after the market’s close, Spitzer said.
Traders time the market by making short-term trades with mutual fund shares – sometimes dumping them the next day – to exploit instances when the fund’s net asset value hasn’t caught up with the underlying value of its holdings. Many mutual fund firms say they try to discourage the practice because it drives up costs for long- term fund shareholders.
Fidelity Investments spokeswoman Anne Crowley said her fund firm, the largest in the country, hasn’t received a subpoena from Spitzer. She said Fidelity has taken strong measures to prevent the short- term “market timing” of Fidelity fund shares.
Spitzer and Galvin have taken prominent roles in investigating fund firms this year.
The source in Galvin’s office said the Prudential probe involves trades similar to those discussed by Spitzer yesterday. A spokesman for Prudential Securities, which is now a part of Wachovia Securities, said late yesterday that he was unaware of any investigation in Massachusetts.
Mercer Bullard, founder of the Fund Democracy activist group, said Spitzer’s actions bolster the need to maintain the state regulators’ powers – an issue that’s being debated in Congress.
But the Securities and Exchange Commission is reportedly preparing reforms for the hedge and mutual fund industries. Those reforms could be revealed in a few weeks.
Herald Wire services contributed to this article.
Caption: BIRDS OF A FEATHER: New York Attorney General Eliott Spitzer discusses a settlement yesterday made with Canary Capital Partners in a mutual and hedge fund investigation that may be picked up by the Hub AG. AP photo
