Schwab Unit Reports Fund Scandal Inquiries

May 19, 2004 ( - State and federal prosecutors may bring the ongoing mutual fund trading scandal even more squarely to Charles Schwab's doorstep.

A unit of the San Francisco-based discount broker revealed in a regulatory filing that three funds had gotten inquiries from the U.S. Attorney’s office in San Francisco and the West Virginia Attorney General’s office about possible market timing and late trading, the Associated Press reported. Reporting the contact was Schwab’s U.S. Trust Co. unit.

Schwab disclosed in November that the company and its affiliates were responding to federal and state inquiries stemming from the industrywide probes of improper fund trading and distribution practices (See   Schwab Swabs Employees For Deleting E-Mails Related to Probe ). In particular, Schwab said some affiliates were under SEC examination and had received subpoenas from the New York Attorney General’s office.

Schwab has reported that U.S. Trust allowed “a small number of parties” to engage in short-term trading of certain funds in its Excelsior family. U.S. Trust terminated those arrangements last summer, and the company said in May that it is still assessing the impact that the short-term trading had on the funds.

In addition, an internal review of fund-trading patterns and policies uncovered “a small percentage” of trades through Schwab’s Mutual Fund MarketPlace service that clients submitted after markets closed but were modified after Schwab employees contacted the clients, according to previous regulatory filings. Schwab has said it didn’t find evidence that employees deliberately circumvented rules or set up late-trading arrangements with clients.

Federal and state authorities have been pursuing a wide-ranging investigation of abusive fund trading centering on market timing, late trading and certain sales practices.