Canary Chief Sings on Fund Trading Stand
Stern, the star witness in the prosecution’s case against former Bank of America broker Theodore Sihpol, headed Canary Capital Partners, which was allegedly recruited to be a Bank of America client, according to New York Attorney General Eliot Spitzer’s 25-page indictment (see Ex-BoA Broker Sihpol Indicted in Scandal ). Sihpol, who is the first individual to be tried on criminal charges in the matter, started to cultivate Edward Stern, the managing principal of Secaucus, New Jersey-based Canary Capital, as a client in an April 2001 visit to the hedge fund’s headquarters, according to Spitzer’s September 2003 suit against Canary (see Spitzer Fund Abuse Probe Pumps Out More Subpoenas ). Stern asked Sihpol if the bank would allow the fund to time trades and provide financing and clearing services, Spitzer’s suit alleges.
According to a report in TheStreet.com, Stern testified that he “did not feel entirely comfortable” with the late trading his hedge fund was doing with Sihpol’s company. As time went on, Stern said, he had a feeling it might be wrong, even though late trading helped Canary post double-digit returns during a brutal three-year bear market.
On cross-examination, Stern said he never explicitly told Sihpol that Canary was engaging in late trading, but that he assumed the broker understood what was going on, given that Canary was allowed to submit trades to Bank of America up until 6:30 p.m. EDT. Stern went so far as to say that he rarely, if ever, used the potentially incriminating phrase “late trading.” Instead, he often referred to after-hours trading as “nice insurance.” Late trading was just a way to ensure that Canary wouldn’t get burnt by late-breaking news, he said, according to theStreet.com.
Deputy Attorney General Harold Wilson had Stern read excerpts from a letter he wrote to Sihpol in May 2001 confirming their arrangement. In the letter, Stern makes reference to a February 2001 meeting with Sihpol and several other Bank of America officials, in which a 6:30 p.m. cutoff time for submitting trades was discussed. The letter never mentions the deadline, and Stern testified he omitted the time because he wasn’t “comfortable” with “putting it in writing.” However, on cross-examination by defense attorney Paul Schectman, Stern said he didn’t think he was breaking the law, according to theStreet.com report.
Spitzer took an especially keen interest in the Bank of America case because of how high Spitzer contends the scandal went, all the way up to the head of the bank’s asset management unit, Richard Demartini (see BofA, Fleet near Settlement with SEC, Spitzer ).
Market timing is the frequent trading of mutual fund shares for a quick profit. While the trading strategy is legal, it can be abusive to the interests of long-term mutual fund shareholders, and many fund families try to discourage it and state as much in their prospectuses.
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