For months, the roots of the sprawling investigation that has rocked the nation’s mutual fund industry have been shrouded in mystery.
But now, the woman who blew the whistle on Edward J. Stern, launching a wide-ranging probe, has stepped forward.
Noreen Harrington, 47, a former employee of an investment company owned by the wealthy Stern family, voluntarily called the office of New York Attorney General Eliot Spitzer in the summer, said office spokesman Brad Maione. She told the office of her belief that the Secaucus-based Canary Capital hedge fund was trading illegally, he said.
Stern, whose family also owns the Hartz Mountain Industries development company, signed a $40 million settlement with Spitzer on Sept. 3 and agreed to cooperate with his ongoing investigation.
Stern admitted no wrongdoing, but Spitzer released a 44-page complaint stating that Canary illegally traded in mutual funds after hours and also engaged in “market timing” to make quick trades that take advantage of the market’s sluggish movement. Though market timing is not illegal, many funds say they do not allow it because it can reduce the value of shares owned by the average investor.
The identities of informants in the investigation were kept secret to protect them, Maione said. But in this case, he said, Harrington “stated she wanted to come forward.”
“She was extremely helpful in giving us guidance and people to talk to,” he added.
Bloomberg News said Harrington previously worked at Barclays Capital and Goldman Sachs Group Inc. and said, “I went to Spitzer because my perception of him was he would fix the problem if I pointed him in the right direction.”
But a Stern family spokesman questioned Harrington’s motives for contacting Spitzer, and particularly for coming forward now.
Spokesman Ron Simoncini said Harrington, a manager in a fund that invested the Stern family assets, was terminated in March 2002 after a year on the job for cause. He declined to be more specific.
Simoncini added that Harrington had $2 million invested in Canary Capital for two years, making $600,000 in profit during the period. He said Harrington kept her investment in the company for 13 months after she left the Sterns’ employment, Simoncini said.
He said Harrington never raised her concerns about the trading with Stern. She removed the money as the fund was being liquidated, shortly before the Spitzer investigation began, he said.
“I don’t think anybody could explain a betrayal that turns out to have been so malicious except to say there had to be at least some vengeful motive,” Simoncini said. “If her moral crisis runs that deep, then certainly she should return her share of the profits.”
The Wall Street Journal on Tuesday also identified two other informants who have helped Spitzer’s probe: One, James Nesfield, was a consultant who helped find funds for Canary to trade in, and the other, Andrew Goodwin, is a former Canary trader, the paper reported.
Simoncini said he did not know Nesfield, but confirmed that Goodwin worked for Canary and was terminated for cause.
Since the settlement, more than half a dozen shareholder suits have been filed against Stern and the mutual funds he traded with. And Stern’s involvement in the mutual fund trades has continued to be a central part of the probe, which has ensnared several prominent companies.
In mid-September, Spitzer filed charges of larceny and securities fraud against Bank of America broker Theodore C. Sihpol III – who helped Stern set up a mutual trading account with the bank. The charges cited Stern’s testimony.
Last week, Stern’s name emerged as part of allegations by Spitzer and the Securities and Exchange Commission against Invesco Funds Group Inc. of Denver and its chief executive, Raymond Cunningham. Authorities charged that the company and Cunningham allowed certain big clients to engage in market timing.
Documents filed with the complaint state that Canary Capital was one of the companies involved in the allegedly improper trading.
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