Latest Firm Charged With Late Trading

December 4, 2003 ( - The Securities and Exchange Commission (SEC) has filed a civil complaint against alleging the Dallas-based investment advisor committed fraud related to improperly traded mutual fund shares.

The SEC says the fraud occurred as the company aidedinstitutional brokerage and advisory clients carry out thousands of market-timing and illegal late trades in mutual fund shares.   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, according to a news release.  

In addition to charges brought against the firm, the SEC filed civil charges against the firm’s chief executive, Richard Sapio, its president, Eric McDonald, its compliance officer, Michele Leftwich, and two affiliated broker-dealer firms: Connely Dowd Management and MTT Fundcorp.  

The SEC claims the three executives “devised and perpetrated a number of deceptive acts and practices to conceal their clients’ market timing activities from those seeking to restrict them.”   Specifically, the SEC points to alleged activities such as:

  • the formation and registration of the two affiliated broker-dealers through which they could continue to market-time undetected
  • changing account numbers for blocked customer accounts
  • use of alternative registered representative numbers for registered representatives who were blocked from trading by mutual funds
  • use of different branch identification numbers
  • switching clearing firms
  • suggesting that their customers use third party tax identification numbers or social security numbers to disguise their identities, so that they could continue to trade in funds from which they had been banned.

The SEC 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.

The firm and its affiliates then attempted to conceal these activities by omitting portions of the trading information that they were required to provide to clearing agents.

“The defendants used a whole host of methods to try to mask their illegal market timing and late trading. These efforts at concealment illustrate the lengths to which the defendants were willing to go to continue enriching themselves at the expense of long-term mutual fund investors,” Stephen Cutler, Director of the SEC’s Division of Enforcement, said in the statement.

Line Up now joins an infamous group of investment advisors charged by various regulatory bodies with illicit mutual fund activity.   Earlier this week, Invesco Funds Group and its president and chief executive officer Raymond Cunningham were slapped with parallel state and federal civil fraud lawsuits in connection with allegations of widespread market timing (See  Prosecutors: Invesco Engaged in Massive Market Timing Scheme ).

Prior to the most recent actions, complaints were also filed againstother well-known fund companies, including Putnam Investments and the Pilgrim Baxter fund family (See  Putnam, SEC Reach Securities Fraud SettlementSEC Slaps PBHG Founders With Lawsuit ). Others, including Strong Financial Corp. and Alliance Capital Management, have acknowledged that market timing occurred but have not been charged.