ALBANY, N.Y. (AP) – The first criminal charges in the mutual fund scandal were filed Tuesday by New York’s attorney general, accusing three former top executives at Security Trust Co. with “pervasivemisconduct” in a late-trading scheme that cost investors $1 million.

Those charged include the chief executive officer of the Phoenix-based company, which processes mutual fund trade orders for pension plans and retirement systems.

New York Attorney General Eliot Spitzer charged former Security Trust CEO Grant D. Seeger, former President William A. Kenyon and former senior vice president of Corporate Services Nicole McDermott, with grand larceny, falsifying business records and securities fraud under the state’s Martin Act.

If convicted of the most serious charges, they could face eight to 25 years in prison, he said.

The Securities and Exchange Commission filed civil charges against the former executives and the firm, and the U.S. Treasury Department’s Office of the Comptroller of Currency has also begun an enforcement action that could dissolve the company.

“A coordinated response by regulators will ensure that high-ranking officials of the company and the corporate entity itself will be held accountable for schemes that defrauded investors,” Spitzer said.

A message seeking comment from Security Trust was not immediately returned.

Security Trust is the latest in a series of financial institutions to be accused in an improper trading scandal. Putnam Investments and Pilgrim Baxter have also been accused of wrongdoing, as have a handful of individuals.

Charges had been widely expected against Security Trust after it was mentioned in a complaint filed earlier this year by Spitzer accusing hedge fund Canary Capital LLC of improper fund trading.

According to that complaint, Security Trust “gave Canary the ability to trade hundreds of additional mutual funds as late as 9 p.m. New York time. So profitable was this opportunity that STC ultimately demanded, and received, a percentage of Canary’s winnings.”

Canary agreed to pay $40 million to settle the charges, but admitted no wrongdoing.

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On the Web:

http://www.securitytrustco.com

Three former top executives at Security Trust Co. were charged Tuesday with acting as middlemen for hedge funds in an illegal mutual funds late-trading scheme that cost investors $1 million.

Those charged with felonies by New York Attorney General Eliot Spitzer include the chief executive of the Phoenix-based company, which processes mutual fund trade orders for pension plans and retirement systems.

No charges were filed against the firm because action Tuesday by the U.S. Treasury Department’s Office of the Comptroller of Currency will force Security Trust to be dissolved by March 31, Spitzer said. “The company is history.”

The Securities and Exchange Commission simultaneously filed civil charges against the former executives and Security Trust.

Security Trust made about $5.8 million from the improper deals with hedge funds over a three year period, the SEC said.

A message seeking comment from Security Trust was not immediately returned.

Spitzer charged former Security Trust CEO Grant D. Seeger, former president William A. Kenyon and former senior vice president of corporate services Nicole McDermott with grand larceny, falsifying business records and securities fraud.

The most serious charges carry prison terms of 8-25 years.

An attorney for Seeger didn’t immediately respond to a request for comment. Telephone numbers for Kenyon and McDermott weren’t immediately available.

Security Trust, which administers $13 billion in assets for 2,300 pension and retirement systems, is the latest financial institution to be accused of improper trading. Putnam Investments and Pilgrim Baxter also have been accused of wrongdoing, as have a handful of individuals.

Charges had been widely expected against Security Trust after it was mentioned in Spitzer’s Sept. 3 complaint accusing hedge fund Canary Capital LLC of improper fund trading. Seeger resigned Oct. 6, and Canary agreed to pay $40 million to settle the charges, but admitted no wrongdoing.

Canary’s Edward Stern is cooperating with Spitzer as part of that settlement.

“Stern has been absolutely essential to our making these cases,” Spitzer said. “The first settlement that we entered with him … should be viewed as the primary reason we’ve been able to make these cases.”

He wouldn’t discuss Jay Marran, identified in the complaint as providing some information on Security Trust, his employer.

“The cases will continue,” Spitzer said. “But more important, I think, will be the effort to reform mutual fund governance that will result from this.”

Spitzer, who first cracked the mutual fund scandal that has since widened to dozens of firms, said in an interview he would “be very surprised if there are no additional criminal cases.” He said he hasn’t yet decided whether some pending cases will be pursued as criminal or civil actions.

Tuesday’s charges accuse the defendants of processing trades by hedge funds hours after the market closed at 4 p.m., allowing them to profit on after-hours news. Late trading allows a favored investor to take advantage of any events after the market closes that are not reflected in the fund’s closing price. Regular investors at that hour would have had to chance the next day’s closing price, since mutual funds price just once per day.

Security Trust also devised several ways to try to disguise trades to allow hedge funds to jump in and out of funds, a practice called market timing, to profit on price fluctuations, the SEC said. The practice is prohibited in many funds’ prospectuses, though the investigation has uncovered relationships funds had to allow hedge funds and other investors to make such trades at the expense of other longer-term shareholders in return for fees and kickbacks.

Security Trust conducted hundreds of trades for Canary Capital in nearly 400 different funds from May 2000 to July 2003, and the SEC complaint said about 99 percent of them were done after the market closed.

The complaint also said Security Trust had a 4 percent profit-sharing arrangement with the hedge funds and received a custodial fee of as much as 1 percent from them, compared with .10 percent from other clients.

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On the Net:

http://www.securitytrustco.com

Criminal charges were filed Tuesday against three former top executives at Security Trust Co. for allegedly acting as middlemen for hedge funds in an illegal late-trading scheme that cost investors$1 million.

Those charged with felonies by New York Attorney General Eliot Spitzer include the chief executive of the Phoenix-based company, which processes mutual fund trade orders for pension plans and retirement systems. The charges were the first criminal complaints filed by Spitzer, who first cracked the mutual fund scandal. The investigation of mutual fund trading practices has widened to include dozens of firms.

The Securities and Exchange Commission simultaneously filled civil charges against the former executives and Security Trust, and the U.S. Treasury Department’s Office of the Comptroller of Currency has also begun an enforcement action that could force the dissolution of the company.

Security Trust made about $5.8 million from the improper deals with hedge funds, the SEC said.

A message seeking comment from Security Trust was not immediately returned.

“A coordinated response by regulators will ensure that high-ranking officials of the company and the corporate entity itself will be held accountable for schemes that defrauded investors,” Spitzer said.

Spitzer charged former Security Trust CEO Grant D. Seeger, former President William A. Kenyon and former senior vice president of Corporate Services Nicole McDermott, with grand larceny, falsifying business records and securities fraud under the state’s Martin Act.

If convicted of the most serious charges, they could face eight to 25 years in prison, Spitzer said.

Security Trust, which administers $13 billion in assets for 2,300 pension and retirement systems, is the latest in a series of financial institutions to be accused in an improper trading scandal. Putnam Investments and Pilgrim Baxter have also been accused of wrongdoing, as have a handful of individuals.

Charges had been widely expected against Security Trust after it was mentioned in a Sept. 3 complaint by Spitzer accusing hedge fund Canary Capital LLC of improper fund trading.

Seeger resigned Oct. 6, about a month after he was named in the Canary complaint that made the mutual fund investigation public.

Canary agreed to pay $40 million to settle the charges, but admitted no wrongdoing.

The charges filed Tuesday by Spitzer accuse the defendants of processing trades by hedge funds hours after the market closed at the 4 p.m., allowing them to profit on after-hours news.

The fraud was accomplished by “disguising” the illegal trades as orders from one of their many pension plan clients. This deceived the funds into making the trades.

So-called late trading is prohibited by New York law and SEC regulations because it allows a favored investor to take advantage of any events that happen after the market closes that are not reflected in the fund’s closing price.

Regular investors at that hour would have had to chance the next day’s closing price, as mutual funds price just once per day.

The SEC complaint said that about 99 percent of the trades Security Trust handled for Canary Capital were done after the market closed. Security Trust conducted hundreds of trades for Canary Capital in nearly 400 different funds from May 2000 to July 2003.

The complaint also said Security Trust received a custodial fee of as much as 1 percent from hedge funds, while most of its other clients gave it only a .10 percent custodial fee, and had a 4 percent profit sharing arrangement with the hedge funds.

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On the Net:

http://www.securitytrustco.com