NEW YORK (HedgeWorld.com)--Former Bank of America securities broker Theodore Sihpol goes on trial this week for his alleged role in helping hedge fund Canary Capital Partners LLC conduct market timing and late trading of mutual fund shares.
He is accused of grand larceny, fraud and falsifying records. Technically, the case is on the calendar of New York State Supreme Court Judge James Yates as Docket No. 01710-2004, but very human realities are involved. For Mr. Sihpol, personal freedom is at stake. If convicted on all counts, he faces up to 25 years in prison.
Also at stake is the legal validity of New York State Attorney General Eliot Spitzer's year-and-a-half long crusade against market timing and late trading in mutual fund shares. Mr. Spitzer, who plans to run for governor of New York in part based on his reputation as a tough-but-fair defender of the rights of the little guy, has wrangled billions in settlements from big mutual fund companies and their executives. Mr. Sihpol's is the first such case to go to trial, however.
Jury selection begins Tuesday [April 26], and Judge Yates has said he expects the trial to last between six and eight weeks. During that time, Assistant State's Attorney Harold J. Wilson will present New York's case against Mr. Sihpol. According to the original criminal complaint, filed more than a year ago, Mr. Sihpol helped Canary Capital conduct late trading and market timing of Bank of America's own Nations Funds mutual funds by executing the trades--manually at first and later via an electronic trading platform he had installed at Canary's Secaucus, N.J., offices.
Among those who provided information that led to the indictment were Edward J. Stern, managing principal at Canary, and Andrew Goodwin, a trader at the hedge fund.
Mr. Stern told the attorney general's office that his fund "routinely" engaged in late trading--that is, execution of mutual fund trades after the 4 p.m. ET market close--with Mr. Sihpol. At the heart of the attorney general's case is that such late trading was at the time prohibited by SEC regulations because it gave certain customers an unfair advantage over ordinary shareholders.
Customarily, mutual fund trade orders had to be submitted and processed prior to the 4 p.m. market close. But late trading allows certain customers to submit and process trades after 4 p.m., potentially enabling them to take advantage of post-market close news that would affect share prices starting when the markets open the next morning.
In a news release announcing Mr. Sihpol's indictment, Mr. Spitzer said, "?? 1/2 [M]y office is pursuing those responsible for illegal trading schemes that potentially cost mutual fund shareholders millions of dollars annually."
Echoing that sentiment, the then-director of the Securities and Exchange Commission's Division of Enforcement, Stephen M. Cutler, called Mr. Sihpol's conduct "antithetical to what investors expect when they buy or sell mutual funds, which is that each of them will be treated fairly."
Bank of America settled market-timing and late-trading allegations against it by paying US$375 million, reducing mutual fund fees and agreeing to close its securities clearing business.
Mr. Sihpol, however, has not caved. His attorney, C. Evan Stewart of the New York law firm Brown Raysman Millstein Felder and Steiner LLP, plans to mount an aggressive defense, arguing in part that late trading was not illegal and that the Attorney General has unfairly singled out Mr. Sihpol--the quintessential "little guy" who stood on the bottom rung of those responsible for Bank of America's conduct with respect to late trading and market timing.
"Our job is to be as well prepared and as ready as possible," Mr. Stewart said. "We're bringing an enormous amount of legal talent to bear to protect this man's liberty."
Mr. Sihpol, 37, has been unemployed since the original allegations against him and Bank of America came to light in September 2003. He sold his New Canaan, Conn., house to pay his legal bills and has spent his time preparing for the trial and caring for his young child.
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.