Oct. 3–New York State Attorney General Eliot Spitzer yesterday secured his first felony conviction in his expanding probe of illegal and improper mutual fund trading practices.
Steven B. Markovitz, a former executive and senior trader with Millennium Partners Lp hedge fund in Manhattan, pleaded guilty to violating state securities laws. He engaged in illegal “late” trading of mutual funds.
Sentencing is scheduled for Dec. 15, when Markovitz could receive up to four years in prison, said a Spitzer spokeswoman. Sources said Markovitz is now cooperating with investigators. Markovitz’s attorney Thomas Fitzpatrick did not return a phone call seeking comment.
Employed at Millennium, from 1999 until last month, Markovitz also settled securities fraud charges with the Securities and Exchange Commission. He has agreed to a lifetime ban from association with an investment adviser or mutual fund. Once they are computed, he will also disgorge illegal gains and pay civil penalties, said Mark Schonfeld, associate regional director at the SEC’s Manhattan office.
Millennium was founded by Wall Street investor Israel Englander in 1989. Today the company has $4 billion under management. Spitzer’s office has subpoenaed the firm, which is cooperating with the investigation, sources said.
Englander yesterday referred calls to a spokesman, who declined comment.
In so-called “late trading,” a mutual fund allows a favored investor to break the law by purchasing shares in the fund at that day’s price after the 4 p.m. close. That way the investor can take advantage of news or announcements that would likely move the markets the following day.
“It’s analogous to being able to place a bet on a horse race after the race has started,” Schonfeld said.
The attorney general’s office stated that Markovitz received the assistance of “certain registered broker-dealers” to carry out his activity, but declined to identify them, citing an ongoing investigation. Neither the state nor the SEC would name the funds in which Markovitz traded.
Markovitz’ plea comes nearly a month after Spitzer unveiled his mutual fund probe with a $40-million settlement with hedge fund manager Edward Stern, who ran Manhattan-based Canary Capital Partners. Stern, who did not admit wrongdoing, engaged in late trading and market timing, which is not illegal.
He agreed not to trade in mutual funds or manage any public investment funds for 10 years. The quick “in-and-out” trading involved in market timing lowers returns for long-term investors.
The speed of the plea means Markovitz clearly violated the law by late-trading, said Tom Dewey, a partner at Manhattan-based Dewey Pegno & Kramarsky, which defends those charged with securities law violations.
That’s why he didn’t go to trial like Martha Stewart, who faces insider trading charges for her sale of ImClone stock, or Frank Quattrone, currently on trial for document destruction.
The latter two felt they had a chance in front of a jury, while Markovitz apparently did not, said Dewey, who expects more convictions to follow. “You’ll be seeing a lot more similar pleas,” he said.
In another development yesterday, Citigroup’s Smith Barney brokerage unit fired a broker for canceling mutual fund trades after the market closed, according to an internal memo obtained by Reuters yesterday.
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