NEW YORK (HedgeWorld.com)–Eliot Spitzer, New York State Attorney General, alleges that Canary Capital Partners LLC, a firm with offices in Secaucus, N.J., and New York City, engaged in fraudulent schemes from 1999 to 2003 that made it tens of millions of dollars at the expense of mutual fund investors.
The New York State Attorney General announced a US$40 million settlement with Canary Capital this morning. The firm is cooperating in a broad investigation into illegal practices by large mutual fund companies Previous HedgeWorld Story.
Following the announcement, Securities and Exchange Commission Chairman William H. Donaldson said, “The conduct alleged in the complaint is reprehensible and there is no place for it in our markets. Today’s action further illustrates the importance of the SEC’s ongoing review of both hedge funds and mutual funds and the SEC’s upcoming recommendations regarding improvements and increased disclosure requirements for both. As we have stated in announcing our current and ongoing study of hedge funds, there is too much money at stake for us to know as little as we do about these funds, in particular, and how they operate. Concurrently, the broad participation by individual investors in mutual funds requires that we do everything possible to understand, anticipate and address areas where there is the potential for abuse and fraud.”
Mr. Spitzer said that Canary manager Edward Stern had special relationships with Bank of America, Janus Capital Corp., Banc One, Strong Capital Management and many other mutual fund companies, which allowed him to use allegedly illegal trading strategies.
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Mr. Stern was able to buy mutual fund stocks after closing time and engage in short-term trades that exploited inefficiencies in the way these shares are priced. These practices variously violated SEC rules, New York state law and mutual fund prospectuses, Mr. Spitzer claims.
Mr. Stern invested in hedge funds managed by others and ran two funds of his own, according to a complaint filed with the Supreme Court of the State of New York. After trading with private money starting July 1998, Mr. Stern started raising capital from non-family investors in September 2000. The Canary vehicles, one U.S.-based and the other offshore, were devoted to trading and timing mutual funds.
In 2000, Canary returned net 49.5%. By early 2001, the firm had US$184 million in assets. At the end of that year, assets had grown to US$400 million. The funds returned 28.5% in 2001. In 2002, assets increased to US$730 million, and investors made 15%.
But in the first five months of 2003, returns were disappointing at 1.5%. In May 2003, Mr. Stern returned all funds to outside investors. “We hope that you considered the ride to be a good one,” he wrote in a letter announcing this decision. As of July 2003, his firm had received US$40 million in management and performance fees.