A former broker at Bank of America has been charged with larceny and securities fraud, accused of helping a hedge fund engage in after-hours trading of mutual fund shares. The broker, Theodore Sihpol3rd, is the first to face criminal charges by the New York State attorney general, Eliot Spitzer, since Spitzer began his investigation of Wall Street practices. Given the greater burden of proof forcriminal than for civil cases, Spitzer is displaying confidence in his case, securities lawyers said. Previous actions against Wall Street firms were civil suits that ended in settlements. Along withthe state attorney general’s fraud charges filed Tuesday, the Securities and Exchange Commission announced a civil enforcement action against Sihpol, seeking penalties, disgorgement of gains andpotentially his exclusion from the securities industry. Sihpol’s lawyer said he would fight the criminal charges. Both regulators indicated that they were actively investigating trading practices atmutual fund companies. This is a widening and continuing investigation, which is likely to result in numerous other charges, Spitzer said at a news conference. Two weeks ago, Spitzer announced a $40million settlement with Canary Capital, which he said had engaged in improper trades in mutual funds managed by Bank of America as well as funds managed by Bank One, Strong Capital and Janus. Sihpol,36, of New Canaan, Connecticut, was a broker with Bank of America’s private client services group, which caters to wealthy individuals. At the request of Edward Stern, the manager of Canary, Sihpolarranged for the hedge fund to buy or sell mutual fund shares after the market had closed but to process the trades based on the shares’ value at the market closing, according to the regulators.Ordinary investors who place an order after the main U.S. stock markets close at 4 p.m. Eastern time get the next day’s price. If some event after that time moved market prices, Stern was in aposition to profit, while ordinary investors could not.
This behavior is egregious, and we believe that, if proven, the facts demonstrate straightforward theft and larceny, Spitzer said in an interview. Spitzer said that Sihpol could face from 8 to 25 years in jail.
