More Charges for Former Execs

August 16, 2004 ( - On Friday federal prosecutors filed criminal securities and wire fraud charges against the former top three executives of, alleging the broker-dealer allowed market-timing of mutual funds by select clients.

Former Chief Executive Richard A. Sapio, former President Eric McDonald, and former Compliance Officer Michele Leftwich were charged in March with conspiracy (see Former Officials at Charged With Securities Fraud ).   The three originally faced up to five years in prison and a $250,000 fine on a single count. The new charges relate to the same alleged scheme but carry stiffer sentences: If convicted of wire fraud, each executive faces up to 30 years in prison and a $1 million fine. said the former executives “are vigorously defending themselves against the charges” and the case won’t affect the company’s operations.

Multiple Warnings

According to the US Attorneys Office for the Southern District of New York, Dallas-based received many warnings from mutual fund companies that its practices hurt shareholders and not only ignored the complaints, but used deceptive practices (such as creating and using multiple account numbers for the same client, creating affiliated broker-dealers, and using multiple clearing firms) to execute trades.  

The Securities and Exchange Commission initially detected the alleged misconduct at and filed a civil securities fraud complaint against the three executives in December.   In fact, between July 2001 and September 2003, the SEC alleges hundreds of mutual fund firms and two clearing companies warned that its market-timing activities were improper. By September, roughly 294 mutual fund companies had banned or restricted from trading in their shares (see Latest Firm Charged with Late Trading ).

Elizabeth Yingling, who represents defendants in the SEC case, said there are no settlement talks in process. “With respect to the civil case, there is no statute or regulation that prohibits market-timing,” she said. “Market-timing has been going on for years and years.”  

Of course, the SEC has also charged that, at least during 2003, “routinely received trading instructions from customers after 4 p.m. EST and executed those trades as if the trading instructions had been received prior to that closing time,” thus participating in the illegal practice of late trading, which allows investors to profit from late-breaking news that is likely to be reflected in a fund’s share price the following day (see Latest Firm Charged with Late Trading ).