Nov. 26–Federal regulators yesterday carried out their first act of capital punishment as part of the widening mutual fund investigation, ordering the Security Trust Co. out of business.

The tough action came as New York Attorney General Eliot Spitzer filed felony charges against three former executives of the Phoenix-based fund for their role in aiding illegal trading by hedge funds.

The Securities and Exchange Commission also filed civil charges against Security Trust Co. and the three former executives — Grant Seeger, William Kenyon and Nicole McDermott — accusing the firm of allowing hedge funds including Manhattan-based Canary Capital Management to conduct so-called “late trading” of fund shares over a three-year period. The agencies say that the firm netted $5.8 million in fees through the arrangements with Canary and other principals.

The moves represent the first time a company implicated in the widening mutual-fund probe will be shut down due to its role.

“We felt it was necessary to take a forceful action in this case,” said Daniel P. Stipano, deputy chief counsel for Office of the Comptroller of the Currency, the federal agency that ordered the 143-employee firm to dissolve.

Given that Security Trust faces massive civil and criminal liabilities, Stipano said it was important for federal regulators to step in and ensure that 401(k) participants, mutual funds and other customers were not harmed by the actions.

“We wanted to begin the orderly process of dissolution at a time when the bank had money on hand,” Stipano said.

Attorneys for Seeger and Kenyon did not return calls seeking comment. An attorney for McDermott could not be found.

The firm had brought on new management in early October to try to move the company forward, but now Security Trust said it is prepared to take the steps to carry out the dissolution by March 31.

Clients “should take comfort in the fact we have stabilized STC so we can transfer their business to another entity that will be able to sustain the services they require,” Securities Trust chief executive Tom Plumb said in a statement.

The illegal practice of late trading allows investors to buy at the 4 p.m. price after the markets have closed. Mutual funds generally set their prices once a day, so the practice allows traders to profit from the knowledge of whether the fund will be up or down. The SEC alleges that 99 percent of the orders Canary Capital transmitted to Security Trust came after 4 p.m.

Investigators also allege that the firm allowed hedge funds to practice rapid short term “market timing.” While not illegal, many mutual fund policies don’t permit market timing because it lowers the profits of long-term investors.

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