SEC Snares J.B. Oxford in Scandal Net

August 25, 2004 ( - A Los Angeles-based brokerage was the latest to be caught up in the regulatory net as federal regulators charged the company Wednesday with civil fraud for facilitating illegal mutual fund trading practices.

The US Securities and Exchange Commission (SEC)  charged Wednesday  that J.B. Oxford cleared and processed thousands of market-timing and late trades in over 600 mutual funds for several hedge funds and small brokerages. The SEC alleged that J.B. Oxford had written agreements with customers that permitted it to keep a 1% custodial fee in exchange for helping them engage in improper trading. The firm  has a long history of regulatory violations, according to a report.

Former J.B. Oxford executives also charged by the SEC are James Lewis, the firm’s former president and chief operating officer; James Lin, a former National Clearing vice president; and Kraig Kibble, a former National Clearing director of operations.

The filing of the civil charges comes just days after J.B. Oxford sold its small clearing division, its last line of business, which securities regulators contend processed the improper trades, according to The company sold its National Clearing Corp. (NCC) subsidiary on August 20 to North American Clearing for $100,000 and future payments that could total up to $2.5 million. J.B. Oxford disclosed the sale in a corporate filing late Tuesday.

The sale of National Clearing comes a little over two months after J.B. Oxford peddled its online brokerage business to Ameritrade for $26 million, according to report.  Following the deals, J.B. Oxford has no other source of income, but the company insists it “has no current plan to liquidate.” The sales could be a way for the money-losing brokerage to raise cash for a potential regulatory settlement with the SEC.

In the complaint, the SEC charged J.B. Oxford not only allowed customers to submit mutual fund trades after the customary 4 p.m. ET deadline, but used “deceptive tactics” to hide other clients’ market timing, or frequent trading. For example, when a mutual fund restricted market timing activities, NCC opened additional accounts and used new account numbers instead of the previously restricted account numbers; using additional registered representative codes for the same previously restricted representatives; and using additional office identification numbers for the same previously restricted offices, regulators charged.

The SEC alleged that the trading arrangements generated $1 million in proceeds for J.B. Oxford. The SEC complaint describes one J.B. Oxford client as a London-based advisor for a Swiss-based money management firm and another as a Boca Raton , Fla., brokerage.

The filing of fraud charges against J.B. Oxford is not a surprise. Earlier this year, the SEC notified the firm of its intent to bring civil and administrative proceedings against it.

SEC officials, in announcing the charges against J.B. Oxford, said the commission intends to punish not only abusive fund traders and mutual fund companies, but the financial intermediaries that enabled the improper trading to occur.

“When clearing firms illegally permit their customers to trade mutual funds using special access to after-hours trading and conceal their customers’ market-timing activities from mutual funds … they violate the federal securities law and will be prosecuted,” said Randall Lee, regional director of the SEC’s Los Angeles office.

Last September, New York Attorney General Eliot Spitzer named J.B. Oxford as one of several brokerages that processed improper trades for Canary Capital Partners. Canary is the New Jersey hedge fund that has played a central role in the investigation into improper trading activity in the $7.4 trillion mutual fund industry.

Federal and state regulators have been pursuing a wide-ranging investigation of the mutual fund industry, focusing primarily on market timing, late trading, and certain sales practices.