Nov. 26–Boston-based MFS Investment Management’s Emerging Growth fund was one of six mutual funds each taken for more than $1 million in an illegal late-trading scheme involving former topexecutives of Security Trust Co. and a New Jersey hedge fund, government regulators charged yesterday.
The Securities and Exchange Commission filed civil fraud charges against Security Trust and the three executives, New York Attorney General Eliot Spitzer launched grand larceny and other felony charges against the three, while the Comptroller of the Currency said it would dissolve the Phoenix company, which processes mutual fund trade orders for retirement plans.
Regulators said the former executives, chief executive Grant D. Seeger, president William A. Kenyon, and senior vice president Nicole McDermott, aided the Canary Capital group of hedge funds in disguising or hiding hundreds of late-in-the-day trades Canary made in numerous mutual funds as instead coming from a retirement plan or pension fund.
Late trading, which is illegal, involves investors placing orders after the 4 p.m. cutoff for that day’s pricing of mutual funds, but getting the 4 p.m. price nonetheless.
While the SEC alleged that Security Trust and the three executives facilitated illegal trades in 397 mutual funds altogether, Spizter’s office said there were six funds in particular, including the MFS fund, in which the traders were most active, and that resulted in the larceny of more than $1 million from each fund.
For now, Spitzer’s office said the mutual funds were “deceived” into making the trades. But SEC and Spitzer officials also cautioned that their investigations into the Canary trading schemes are ongoing.
“You should assume they’re innocent,” Spitzer spokesman Darren Dopp said of MFS and the five other funds.
An MFS spokesman, John Reilly, declined to comment.
In early September, Spitzer’s office unveiled a $40 million settlement with Canary. The SEC said Canary made over $85 million in its late trading and market timing schemes, and shared 4 percent of its profits above a certain level with Security Trust, which allegedly made nearly $6 million in the deal.
The Phoenix company is the first middleman to be targeted in the ongoing government investigations. Previously, charges were brought against either hedge funds or mutual funds or their employees. Security Trust is also the first business to be ordered to shut down in the now-burgeoning probes of trading abuses in the industry.
Current Security Trust chief executive Thomas E. Plumb said in a statement that the company’s clients would be transferred to another entity, and that it would work with “authorities to achieve an orderly dissolution of the company by March 31.”
The three former executives appeared in New York State Criminal Court for their arraignments yesterday afternoon.
Frederick Hafetz, Seeger’s lawyer, said his client’s conduct wasn’t criminal. “He did nothing illegal,” he said.
Kenyon’s lawyer, Gerald Shargel, said his client would plead not guilty and contest the charges.
McDermott’s lawyer, Don Martin, said his client was first to complain about the activities to her boss and to Security Trust’s board. “It’s extremely regrettable and disappointing that they have chosen to charge her,” Martin said from his office in Phoenix.
If convicted, Seeger, the 41-year-old founder and former chief executive of Security Trust, along with Kenyon, 57, and McDermott, 34, may serve up to 25 years in prison on the most serious counts of grand larceny, regulators said.
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