NEW YORK — The rapidly expanding mutual fund probe scored its first conviction Thursday when a former trader for Millennium Partners, a New York hedge fund, pleaded guilty to securities fraudThursday for illegal fund trades.<\/p>\n
Steven Markovitz pleaded guilty in New York State Supreme Court. He faces up to four years in prison for a practice called ”late trading” that prosecutors charge is pervasive in the mutual fund industry.<\/p>\n
Last month, New York Attorney General Eliot Spitzer settled charges with a hedge fund, Canary Capital Partners, that it engaged in illegal trading practices with the mutual fund arms of Bank of America and Bank One, and mutual fund providers Strong Financial and Janus Capital.<\/p>\n
Mutual funds are priced once daily at the 4 p.m. ET close, and it’s illegal to buy funds after that to take advantage of any late-breaking news that could affect the fund’s price the next day.<\/p>\n
After 4 p.m., mutual funds also are not allowed to cancel orders placed early in the day. Citigroup’s brokerage unit Smith Barney told employees in an internal memo Thursday that it had fired a broker for canceling mutual fund trades after the market closed.<\/p>\n
The memo did not name the broker, but said Smith Barney is ”committed to maintain the highest standards.” An internal review uncovered the wrongdoing, which was a minor amount of the broker’s business, involving two small hedge funds, according to a source familiar with the probe.<\/p>\n
Hedge funds are loosely regulated investment vehicles that cater to the wealthy. Millennium Partners, with more than $4 billion under management, is one of the USA’s largest hedge fund operators. It is atypical of most hedge funds because it lets traders operate on their own, like subcontractors, says Tom Dewey, a securities lawyer at Dewey Pegno & Kramarsky.<\/p>\n
Markovitz, 41, who is cooperating with investigators, was a trader for Millennium for four years before he quit last month. Markovitz’s lawyer and Millennium, headed by Wall Street investor Israel Englander, refused to comment.<\/p>\n
The Securities and Exchange Commission wants Markovitz, who agreed to be barred from the investment industry, to forfeit any profit made from the trades.<\/p>\n
Firms named in the inquiry are cooperating with authorities, who will be looking to see what kind of oversight they had in place and what they did to right the wrong, says Bryan Farrell at Smith & Carson, an investigation firm.<\/p>\n
”It’s a wise act on the part of these companies to get ahead of us,” Spitzer says.<\/p>\n","protected":false},"excerpt":{"rendered":"
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