Financial services company charged

By Walter Hamilton
Los Angeles Times

NEW YORK — In the strongest crackdown yet in the mutual fund scandal, regulators yesterday ordered the shutdown of a Phoenix financial services company that is accused of helping a hedge fund engage in illegal trading.

Security Trust Co., which served as a middleman between mutual funds and investors in corporate retirement plans, was ordered by federal banking regulators to liquidate its operations by March 31. The firm was charged with helping Canary Capital Partners engage in the late trading and market timing of mutual funds.

Yesterday's order by the federal comptroller of the currency came as New York Attorney General Eliot Spitzer lodged criminal fraud and larceny charges against Security Trust's former CEO and two others. They could face 25 years in prison if convicted of larceny.

The Securities and Exchange Commission brought civil fraud charges against the company and its former executives.

The punishment is the toughest by regulators in the three-month mutual fund debacle. It is the first action against a fund intermediary, opening a window into a murky world that regulators fear may have facilitated much of the improper trading they are uncovering.

Intermediaries such as trust companies and retirement plan administrators handle the behind-the-scenes process by which employees with retirement plans such as 401(k)s buy and sell fund shares each day. The firms lump together thousands of individual orders and send them to fund companies for final execution.

Security Trust, a 12-year-old company with about $13 billion in custodial assets, had intermediary relationships with about 2,500 retirement plan administrators and other customers.

In a statement, Security Trust said that many of the regulators' allegations were true but that the wrongdoing has stopped.