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The Honolulu Advertiser

Posted on: Saturday, December 20, 2003

Fund scandals marginal as criminal case

 •  Janus group to pay back $31.5M for mutual-fund trading offenses

By Justin Pope
Associated Press

BOSTON — Word that a federal grand jury in Boston is looking into recent mutual fund scandals highlights the difficult question of just how deeply criminal prosecutors could or should be involved in a matter that has traditionally been the purview of the civil justice system.

Securities law experts said this week that the grand jury, first reported in The Boston Globe and confirmed by a source with knowledge of the matter, came as no surprise given the volume of material referred to prosecutors by state and federal regulators on the civil side. But there is no guarantee that criminal charges will follow.

The uncertainty is partly due to the delicate legal ground beneath prosecutors, experts say.

Late trading — executing orders at an old price after the window has closed — is clearly illegal. (Unlike stocks, mutual funds price just once a day.)

But market timing — the quick trading in and out of funds that has been at the heart of much of the scandal — is not illegal, though regulators have alleged it amounts to civil fraud if practiced by companies that have promised their customers they don't allow it.

One company, Security Trust Co., was shut down after New York Attorney General Eliot Spitzer brought criminal charges accusing three former executives of grand larceny and other charges for helping hedge funds engage in short-term trading, which skims profits from long-term investors.

On Thursday, Spitzer and the SEC announced a $250 million settlement from Alliance Capital Management for allowing a hedge fund extensively to market-time its funds.

The market-timing arrangement with Alliance allowed Daniel Calugar, owner and president of Security Brokerage Inc. in Las Vegas, to make $64 million in profits, even as fund shareholders lost money, the SEC said.

In a deal that caused friction between the two regulators, the New York attorney general brokered a separate deal forcing Alliance to cut its fees to holders by $350 million over five years.

The payment is the largest ever by a mutual fund adviser, the SEC said. And experts said the size of the payment set a precedent that likely would spur other companies to settle.

That could be good for regulators, because while several experts said egregious market-timing abuses could rise to the necessary threshold for deliberate criminal intent, it could be a tough sell to a jury.

"Market timing alone, I think, is a very difficult and unattractive criminal case," said Jeffrey Stone, a former federal prosecutor who heads the white-collar defense practice at McDermott Will & Emery in Chicago.