New York Attorney General Eliot Spitzer said his office had filed felony charges against Security Trust Co. N.A., (STC) accusing three former senior executives of “pervasive misconduct” in helping in the late trading of mutual funds and the “larceny” of more than $1 million. In addition, the US Securities and Exchange Commission (SEC) filed a civil suit against STC and its executives and the US Treasury Department’s Office of the Comptroller of Currency (OCC) announced it had started efforts to dissolve STC.
Spitzer’s criminal complaint lodges felony charges of grand larceny, falsifying business records and securities fraud under the New York state’s Martin Act against:
- former Chief Executive Officer Grant Seeger
- former President William Kenyon
- former Senior Vice President of Corporate Services Nicole McDermott.
Spitzer alleged that the defendants were middlemen in an illegal late trading scheme involving hedge fund Canary Capital Partners. According to Spitzer, the defendants processed the late trades as if they were timely trades – that is submitted before the market’s 4 p.m. close. They did this by “disguising” the illegal trades as orders from one of their many client pension plans. This deceived the mutual funds into making the trades, according to prosecutors. STC is custodian and trustee for 2,300 retirement plans with $13 billion in assets.
Spitzer alleged in September that Security Trust allowed the hedge fund to slip in trades until 9 p.m. to take advantage of late-breaking news. The trading siphoned profits from long-term fund shareholders, he said (See Spitzer Fund Abuse Probe Pumps Out More Subpoenas ). Late trading is prohibited because it allows a favored investor to take advantage of post-market-closing events not reflected in the share price set at the close of the market.
“Pervasive misconduct must be met with appropriate sanctions,” Spitzer said in a statement. “In this case, a coordinated response by regulators will ensure that high-ranking officials of the company and the corporate entity itself will be held accountable for schemes that defrauded investors.”
SEC, OCC Add Additional Enforcement
In separate actions also announced Tuesday, the SEC said it had filed civil fraud charges against Seeger, Kenyon, and McDermott. Finally, the OCC said said it had issued an order as STC’s primary regulator for STC to dissolve by March 31, 2004. According to the OCC, its order requires STC to make sure the trust accounts and retirement plans it administers suffer the least amount of disruption possible.
The OCC announcement said that in October, it had forced STC’s controlling shareholder, Capital Management Investors Holdings, Inc., to provide a capital infusion so that the company will have enough money to carry out an orderly corporate dissolution.
Spitzer provided some additional background about STC’s role in his September complaint against Canary. According to Spitzer, STC formalized its relationship with Canary in May 2000 in a written agreement that allegedly stated Canary would vary the sizes of its trades through STC “to make them more difficult for fund companies to detect.”
In return for that special treatment, Spitzer alleged, STC would receive “market value fees” from Canary that were 10 times more than legitimate customers paid. STC also received “profit-sharing fees” of 4% of Canary’s late-trading gains, Spitzer claimed. Seeger, resigned in October while, a few weeks later, three other senior executives bailed out and more than 20 staffers were laid off (See More Heads Roll at Security Trust).
At one point after the scandal broke and STC’s involvement was revealed, the company insisted its other clients were not harmed by its trading practices (See STC: Canary Trades Didn’t Harm Other Clients ).