Sep. 4–State Attorney General Eliot Spitzer accused several investment banks and mutual funds of engaging in fraudulent after-hours tradings that cost small investors billions of dollars.
Spitzer said Bank of America, Bank One, Janus Funds and others allowed Edward Stern — son of billionaire Leonard Stern — to trade each firm’s mutual funds at a price the small investor could never get — in exchange for other Stern business.
“In return for the blatantly illegal behavior were very substantial” fees the banks collected, Spitzer told a packed news conference yesterday, brandishing a thick book of company E-mails reminiscent of his probe of Wall Street research. “Bank of America was being bought off.”
Edward, 38, agreed to pay $30 million in restitution and a $10 million fine. Leonard is the former chairman of Hartz Mountain, known for its bird seed. The family’s fortune is estimated at $2.2 billion.
Using the trading schemes, the younger Stern and his firm Canary Capital Partners earned a 50 percent return for his own wealthy investors in 2000, compared with a 6 percent decline in the Dow.
Stern and Canary — a name that reflects the start of his family’s fortune when a friend of Stern’s grandfather paid back a loan with 5,000 singing canaries — admitted no wrongdoing.
Spitzer said he hasn’t come to any similar deals with the banks and mutual funds.
“I see this as an opportunity, with the settlement with Stern and his cooperation, to lay out a problem that needs to be remedied,” Spitzer told the Daily News.
Spitzer alleged the banks and mutual fund companies used “late trading” and “market timing” to profit at small investors’ expense.
In late trading, sophisticated investors buy shares of mutual funds based on the previous day’s price, pocketing gains that could have gone to long-term investors.
In market timing, investors buy and sell mutual fund shares quickly. The trading adds costs and may force the fund to sell stocks to raise cash, which could increase taxes — all expenses born by small investors in the funds.
Bank of America, Bank One, and Janus all said they were cooperating.
Spitzer’s probe comes as the Securities and Exchange Commission continues its investigation of mutual funds and hedge funds. The SEC and Spitzer aren’t working together yet on their probes.
Spitzer’s announcement “further illustrates the importance of the SEC’s ongoing review of both hedge funds and mutual funds and the SEC’s upcoming recommendations for both,” SEC chairman Bill Donaldson said in a statement.
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