Fund Trading in K Plan Lead to Original Canary Tip-Off

December 9, 2003 ( - Edward Stern's refusal to remove Canary Capital Partners LLP's 401(k) plan from a fund company because it allowed him to trade its funds frequently set into motion a massive mutual fund probe now underway.

These were the words of Noreen Harrington, who lifted her shroud of secrecy and identified herself to New York Times reporters as the original whistleblower at Canary.   Harrington, an executive of the investment arm of the billionaire Stern family, was later joined by two other informants, James Nesfield – a consultant to Canary – and Andrew Goodwin – a former Canary trader, according to a Reuters report.

Harrington said she made a phone call to New York Attorney General Eliot Spitzer after she heard traders, managing money for a hedge fund set up by Stern, bragging of how managers of various mutual funds would let them trade in and out of the funds long after the market day had ended for most of the funds’ other investors.   Spitzer confirmed that it was a call from Harrington that had set in motion an ever-widening probe by regulators (See Spitzer Fund Abuse Probe Pumps Out More Subpoenas ).

This call in turn tipped the first domino that has lead to a string of market timing and late trading allegations afterSpitzer said Canary manager Stern received preferential treatment allowing him to buy and sell fund shares at prices not available to other investors from Strong, Bank of America’s Nations Funds, Banc One and Janus by promising to take substantial positions in various funds managed by these institutions (See  Ripples of Canary Fund Trading Probes Continue to Spread ).   Spitzer later announced a $40 million settlement with Stern in the case.  

By that time the damage had already been done, as a mutual fund probe in market timing and late trading activities spread across the land wrapping up the likes of Putnam Investments(See  Putnam, SEC Reach Securities Fraud Settlement ) and Invesco Funds Group (See Prosecutors: Invesco Engaged in Massive Market Timing Scheme ) , among others into the imbroglio.   The high profile activities also lead to reform measures being introduced by the US Securities and Exchange Commission ((SEC) calling for a “hard close” of all mutual fund trades to be into the fund company by 4 pm Eastern Time (See  SEC Lays Down Mutual Fund Proposals ).

The proposals come due to what the agency says is a widespread problem.   Last month the SEC projected as many as a quarter of all mutual fund brokers allowed late trading in and out of mutual fund shares (See   SEC: One Quarter of All Mutual Funds Allowed Late Trading).