The Wall Street Journal reported that employees for the investment banking giant have given testimony to the regulator relating to its failure to pick up on red-flags being raised by the hedge fund before it was fined for late trading and market timing in September 2003 (See Ripples of Canary Fund Trading Probes Continue to Spread ).
J.P. Morgan had lent the hedge fund, led by Edward Stern, up to $150 million with which the fund could leverage its trades. The SEC is looking into whether J.P. Morgan should have seen signals that the fund was engaged in illegal activity.
Morgan lawyers have sent a memo to executives warning that regulators may try to assert that Morgan employees should have known that Canary was engaged in illegal activities, according to the Journal. Also, according to the paper, internal documents showed that employees realized the fund was rapidly trading in and out of mutual funds – or market timing that is illegal if a mutual fund’s documents say it is not allowed – with one e-mail even expressly saying that an employee was aware that Canary would be “day trading”.
The legal memo also notes possible action by J.P. Morgan off of information obtained from Canary. It says that Morgan may have used information that Canary may have improperly acquired and passed on to the bank, according to the Journal.
The discovery of Canary Capital’s late trading and market timing in 2003 helped kick off the mutual fund trading scandal, which has seen numerous mutual funds and officials charged with abusive trading practices by both state and federal securities regulators. .