Federal regulators accused a Dallas investment adviser and three executives of deceiving hundreds of mutual fund companies to help its customers engage in trading irregularities.
One day after proposing new rules to help prevent mutual fund trading abuse, the Securities and Exchange Commission filed a civil fraud complaint against Mutuals.com, accusing it of late trading and market timing.
The complaint named CEO Richard Sapio, 37, President Eric McDonald, 35, and compliance officer Michele Leftwich, 35, as well as two affiliated broker-dealers.
In response to Mutual.com’s market-timing activities, about 294 different fund companies banned or restricted it from trading in their shares, the SEC’s complaint says. The three executives then came up with a plan to conceal the trading irregularities by changing account numbers and suggesting customers use third-party tax identification numbers, among other things, the SEC alleges.
Mutuals.com had at least 18 customers, primarily institutional investors and hedge funds, the agency says.
The SEC says Mutuals.com routinely received trading instructions from customers after 4 p.m. ET and executed them as if they had been received earlier. Late trading is the illegal practice of buying and selling funds after the 4 p.m. close but still getting the 4 p.m. price.
Market timing involves frequent trading, often in international funds, to exploit ”stale” prices due to time zone differences. It is legal but might violate a fund’s rules or fiduciary duty. Market timers typically profit at the expense of long-term shareholders.
The SEC’s complaint cites an e-mail message to Sapio from Pershing, one of Mutual.com’s clearing firms, complaining about market timing. It said, in part: ”It’s not unlike a rock band which knows that they continue to trash hotel rooms on their tours — and as soon as Hyatt throws them out, they’ll move on to Hilton, then Marriott, then somebody else.”
Stephen Topetzes, a lawyer for Mutuals.com and the three executives, says that his clients have been cooperating with the agency and had hoped to resolve the matter before a complaint was filed. The company agreed to the SEC’s recommendation for a court-appointed monitor to oversee its mutual fund operations.
”Our clients intend to contest vigorously the claims and allegations,” he says.
Topetzes also noted that the SEC has not accused the firm of any misconduct related to its own mutual funds. Among them is the Vice fund, launched last year. It focuses on stocks in such industries as gaming, tobacco and alcohol, noting that while they may be considered politically incorrect, they are nearly recession-proof.
