The attorney general of New York State, Eliot Spitzer, expanded his campaign against abuses on Wall Street on Tuesday by bringing the first criminal charges in a sweeping investigation into mutualfund trading. Spitzer filed charges against Theodore Sihpol, a former broker at Bank of America who is accused of helping a hedge fund illegally trade mutual fund shares. Civil charges against Sihpolwere also filed Tuesday by the Securities and Exchange Commission. Our combined message is clear: late trading is wrong; it’s clearly prohibited by the SEC, Stephen Cutler, enforcement director forthe commission, said at a joint news conference in Manhattan, where the new charges were announced. Late trading is prohibited by New York State law and SEC regulations because it allows a favoredinvestor to take advantage of events after the stock markets close that are not reflected in the closing share price. Investors who trade after the deadline can take advantage of potentiallymarket-moving information as much as 24 hours before the shares are valued again. Spitzer said the charges were the first of several expected in the mutual fund investigation he announced this month.Working with the Securities and Exchange Commission, my office is pursuing those responsible for illegal trading schemes that potentially cost mutual fund shareholders millions of dollars annually,he said. Spitzer, who also preceded the SEC in investigating the practices of investment banks, charged Sihpol, 36, with criminal securities fraud and larceny for allowing the hedge fund, CanaryCapital Partners, to engage in trading that gave it access to prices that were not available to all mutual fund investors. The SEC accused Sihpol of violating securities laws. Sihpol surrendered toauthorities in New York City on Tuesday. Sihpol is the first person charged in what has become the biggest investigation of the $6.9 billion mutual fund industry since Congress passed the InvestmentCompany Act of 1940. The SEC has demanded information about trading practices from the 80 largest mutual fund companies. Bank of America has dismissed at least five employees since early this month,when Spitzer filed a complaint against Canary. Canary has agreed to pay $40 million to settle Spitzer’s charges that it was involved in illegal trading schemes with a number of financial institutionsin addition to Bank of America, a group that includes Banc One, Janus Capital Group and Strong Capital Management. Three of the four Bank of America executives named by Spitzer in his Canarycomplaint have been fired. In addition to Sihpol, they are Robert Gordon, head of Bank of America’s Capital Management mutual fund unit, and Charles Bryceland, who ran Bank of America’s New Yorkbrokerage for wealthy clients. Sihpol reported to Bryceland. Richard DeMartini, president of all of the company’s asset management businesses, is the only Bank of America executive named by Spitzerwho is still employed by the company. Kenneth Lewis, Bank of America’s chief executive, said this month that employees responsible for allowing the trading by Canary would be held accountable. Lewisrecruited DeMartini from Morgan Stanley in 2001. Lewis has said he wanted the bank’s asset management subsidiary to triple its contribution to earnings in three to five years. Spitzer has sent acompelling message to cooperate and cut a deal or face time in prison, said Jacob Frenkel, a partner at Smith, Gambrell & Russell in Washington, according to Bloomberg News.
With these state charges, he added, the Spitzer criminal defendants won’t be serving at Club Fed.
