Ex-trader pleads guilty to after-hours trading
Settlement bars him from working for mutual funds
By RIVA D. ATLAS New York Times
Friday, October 3, 2003
New York — A former trader at a major hedge fund pleaded guilty Thursday to after-hours trading in mutual funds shares, becoming the second executive to face criminal charges in the sweeping investigation of fund trading practices.
Steven B. Markovitz, until recently a trader with the $4 billion Millennium Partners in Manhattan, admitted that he bought and sold shares of mutual funds after the market had closed but at the 4 p.m. Eastern time price. He is cooperating with the investigation led by New York Attorney General Eliot Spitzer.
Under a settlement with the Securities and Exchange Commission, Markovitz also agreed to be barred for life from working for an investment adviser or mutual fund and to pay an amount yet to be determined.
The SEC said that at least three broker-dealers had executed Markovitz’s orders but the commission did not name them in its settlement. Officials at the commission and the attorney general’s office declined to identify the brokers, citing their continuing investigation.
Spitzer said he would probably bring additional criminal or civil charges against executives at hedge funds, brokerage firms and mutual funds.
“It’s moving in many different directions,” Spitzer said of his investigation. “This is moving very quickly.”
Markovitz is the second hedge-fund trader to be implicated in improper trading of mutual fund shares. Last month, Spitzer reached a $40 million civil settlement with Canary Capital Partners, a hedge fund run by Edward Stern.
Two weeks later, Spitzer filed criminal charges against a Bank of America broker, accusing the broker of arranging for Stern to trade mutual fund shares after hours.
The attorney general and securities regulators have been examining whether brokers or mutual fund executives allowed favored customers to buy or sell mutual fund shares at prices not available to the public.
The regulators have been looking at market timing, or the rapid trading of fund shares for short-term profits, along with late-day trading, which violates securities laws. Short-term trading is not prohibited, but mutual funds that aided such trading may be in violation of their own stated policies against the practice.
Two executives were suspended this week from Alliance Capital Management, and 12 brokers and managers were fired from Prudential Securities. Citigroup also fired a broker who worked with wealthy individuals for “improperly canceling mutual-fund orders between 4 and 4:15 p.m.,” according to an internal memorandum distributed on Thursday. A spokeswoman for the bank declined to identify the broker or comment on his dismissal.
Last month, Bank of America fired some executives, including Theodore C. Sihpol III, for their role in improper mutual fund trading. A lawyer for Sihpol, the broker accused of aiding Stern, has said he will contest the criminal charge.
Markovitz, 41, was involved in late trading of mutual fund shares from 1999 to 2003, the years he worked at Millennium, according to the administrative order filed by the SEC on Thursday. Markovitz would often give his orders to the brokers before the close of trading, and then would “confirm, alter or cancel the proposed orders after 4 p.m.,” the commission said. In other cases, he would place his order after the close of trading. There was no indication on Thursday of which mutual funds were involved or whether they were aware of Markovitz’s trades.
Under his guilty plea in State Supreme Court in Manhattan, Markovitz could face a prison term of up to four years, Judge James Yates said. He must still reach an agreement on the amount of trading profits to relinquish and an appropriate fine, the SEC said Thursday.
“We will continue to pursue abusive trading practices involving mutual funds to ensure that all investors are treated fairly,” Stephen M. Cutler, SEC director of enforcement, said in a statement.
Markovitz left Millennium on Sept. 15, according to a person close to the firm. A woman who answered the phone at his residence referred calls to his lawyer, who declined to comment.
