Nov. 25–The New York Attorney General, the Securities and Exchange Commission, and the federal Office of the Comptroller of the Currency are expected to file criminal and civil charges as early astoday against a Phoenix-based trust company that’s played an important role in the burgeoning mutual fund scandal, sources said yesterday.

The three agencies will charge Security Trust Co. with securities fraud and criminal charges related to arrangements to allow hedge funds to conduct so-called “late trading” of mutual fund shares, the sources said.

The move against Security Trust is an important development because the bank played a central role in New York Attorney General Eliot Spitzer’s complaint against Manhattan-based hedge-fund Canary Capital Management, announced in September. In that complaint, Spitzer alleged that Security Trust gave Canary the ability to trade hundreds of mutual funds as late as 9 p.m. Eastern time but Canary would attest that the trades were “received” by Canary before 4 p.m.

Security Trust, formed 12 years ago, is a company that handles the record keeping, financial reporting duties and other services for approximately 5,000 mutual funds.

Spitzer likened late trading to betting on horse races after they have finished the run. In this arrangement Security Trust “demanded, and ultimately received, a percentage of Canary’s winnings,” the complaint against Canary said.

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 illegal practice allows traders to buy or sell with knowledge of whether the fund will be up or down.

Security Trust provides back-office administrative services to nearly 2,300 retirement plans and their nearly one million investors and administers more than $13 billion in assets.

Spitzer’s office also alleges that Security Trust set up “market timing” arrangements with hedge funds, which allows short-term traders to frequently buy and sell shares in a mutual fund. That practice is not illegal but harms long-term shareholders by decreasing their profits from the fund.

Security Trust spokeswoman Nancy Murphy declined to comment yesterday. Representatives for the SEC and Spitzer also declined to comment. The media relations department for the Office of the Comptroller of the Currency did not return a call seeking comment.

In the wake of Spitzer’s probe, Security Trust replaced its chief executive, Grant Seeger, and let go more than a dozen employees in October.

The firm’s new chief executive, Tom Plumb, said in an Oct. 20 letter to customers that “outstanding questions remain as to whether any STC employees participated in or allowed participation in this alleged improper activity.” Plumb said the firm has hired an independent accounting firm to investigate the allegations and is working “to address all of our clients’ concerns.”

—–

To see more of Newsday, or to subscribe to the newspaper, go to http://www.newsday.com

(c) 2003, Newsday, Melville, N.Y. Distributed by Knight Ridder/Tribune Business News.