NEW YORK — A former top executive at Fred Alger Management pleaded guilty Thursday to tampering with evidence related to the ongoing investigation of mutual fund trading practices.
James Connelly Jr., 40, former vice chairman of Fred Alger, faces up to four years in prison. He is the second person to plead guilty to criminal charges as a result of New York Attorney General Eliot Spitzer’s investigation of mutual fund trading abuses. The Securities and Exchange Commission and other state regulators also have joined the probe.
Also on Thursday, employees at fund giants Fidelity Investments and Morgan Stanley and a former employee at Franklin Resources were subpoenaed by the Massachusetts Securities Division, the firms acknowledged.
The agency is investigating whether brokers at the three firms helped employees at Prudential Securities evade market controls and engage in market timing, according to a source close to the investigation.
Market timing — a practice banned by many funds, in which investors make rapid-fire trades — is also at the center of Connelly’s case. The SEC said he allowed a hedge fund to engage in market timing in certain Alger funds, which violates a fund adviser’s fiduciary duty and hurts a fund’s value. Connelly will be permanently barred from the industry and will pay $400,000 to settle SEC charges.
Veras Investment Partners, a Texas hedge fund, was named in SEC documents as the firm involved in market timing at Alger. The firm said in a statement that it has received subpoenas from Spitzer’s office and the SEC, and is cooperating.
Spitzer’s office says Connelly repeatedly tried to thwart its investigation by deceiving Alger’s lawyers and encouraging employees to destroy e-mails and other documents. He was suspended from the firm on Sept. 29, along with two other mutual fund sales employees. A 17-year veteran of Alger, he was instrumental in helping rebuild the firm after it lost 35 employees in the World Trade Center attack.
The Massachusetts investigation is zeroing in on whether mutual fund company employees instructed third-party brokers on how to get around their own internal controls designed to detect market timing — a potentially fraudulent practice, a source said. The three mutual fund companies said that while they cannot comment on the specifics of the investigation, they vigorously enforce the laws and policies regarding mutual fund trading.
