A little-known company called Security Trust Co. is caught in the escalating investigation into the questionable business practices of the mutual fund industry.
What remains to be seen is whether the Phoenix-based company merely provided the computerized tools hedge funds allegedly used to bend the rules or if it was more of a direct player.
STC is a player in the behind-the-scenes business of plan administration as a custodian for pension and retirement plans. It provides investors with computer systems that conduct advanced trades of mutual funds.
But according to a complaint filed by the New York attorney general’s office, STC allegedly helped hedge fund Canary ”camouflage” its trades so mutual fund companies didn’t know their shares were being gamed and to allow Canary to make late trades after the market closed. The two signed a pact in May 2000, according to the complaint. An STC official would not comment on the probe.
It’s hard to see how STC could provide the systems that would allow hedge funds to sidestep the rules without knowing what was being done, says University of Southern California finance professor Tom Taulli.
The complaint also says STC provided similar services to other hedge funds. Other experts were surprised to see that the complaint alleged that STC informed Canary of the positions and trades of its regular clients. That would violate the confidentiality agreements most pension funds have with their vendors and could even smack of inside trading, says Alan Bromberg, professor of securities law at Southern Methodist University.
The allegations aren’t bothering some STC customers. HA&W Benefit Advisors, which has used STC’s trading system since last year, says that it plans to stick with STC and that the company never offered any illegal opportunities to it, says David Schultz, partner of retirement plan administration.
Some say the confusion over the way trades are conducted in the mutual fund industry may be making things look worse than they are. 401(k) plans stop taking trades at the close of the business day, typically 4 p.m., says Nevin Adams, executive editor of <I>Plansponsor </I>magazine, a pension industry publication. The trades are communicated and actually settled later, as late as 9 p.m. ”It’s common practice,” Adams says. ”And it might be mischaracterized” if someone doesn’t understand the system.
