PHOENIX (HedgeWorld.com)–Security Trust Co. NA, the first third-party firm to face criminal and civil charges in connection with the growing mutual fund scandal, in March will become the first third-party firm to shut its doors as a result of the growing mutual fund scandal.
Specifically, Security Trust Co., an independent trust company that collects, sorts and submits buy and sell orders to mutual fund families on behalf of approximately US$13 billion in assets belonging to 2,800 retirement plans, trusts, foundations and endowments, will close because of one former client: Canary Capital Partners LLC, Secaucus, N.J.
A criminal complaint filed Tuesday (Nov. 25) by New York State Attorney General Eliot Spitzer charged three former Security Trust Co. executives with helping Canary Capital conduct late trading of shares of mutual fund administered by Security Trust. Former Chief Executive Grant D. Seeger, former President William A. Kenyon and former Senior Vice President of Corporate Services Nicole McDermott all were charged by Mr. Spitzer’s office with grand larceny, falsifying business records and securities fraud.
Also on Wednesday, the U.S. Securities and Exchange Commission filed civil fraud charges against Securities Trust Co., Messrs. Seeger and Kenyon and Ms. McDermott.
But the death knell was sounded by the U.S. Treasury Department’s Office of the Comptroller of the Currency, which regulates banking functions and which issued an order Tuesday requiring Security Trust to dissolve fully by March 31.
Security Trust spokeswoman Nancy Murphy said company officials were disappointed they had been ordered to close the company because they felt they had made serious efforts to address concerns. However, they appreciated the approach mandated by the Office of the Comptroller of the Currency.
In a statement, Security Trust Chief Executive Thomas E. Plumb said the company had, working with regulators, “brought in a new culture, new policies and procedures and new efficiencies that have stabilized STC’s core business. … We can now conduct the safe transfer of the retirement plans with as little disruption as possible.”
Security Trust’s end may not have been a surprise to some. Mr. Spitzer first set his sights on the company in September, when Security Trust was named in a complaint filed by Mr. Spitzer’s office alleging that hedge fund Canary Capital conducted late trading of mutual fund shares at a number of mutual fund companies, including Bank One Corp., Chicago; Bank of America Corp., Charlotte, N.C.; Janus Capital Group Inc., Denver, Colo.; and Strong Financial Corp., Menomonee Falls, Wis. Previous HedgeWorld Story.
Canary in September agreed to pay US$30 million in restitution and a US$10 million penalty to settle the case. But problems have persisted for mutual fund companies. Putnam Investments, Boston, is facing lawsuits alleging some of its own mutual fund portfolio managers used inside information to time personal trades of Putnam fund shares. Since then, institutional investors have pulled billions in assets out of Putnam.
Richard Strong resigned as chairman of Strong Mutual Funds and may face criminal charges in connection with allegations he profited from late trading and market timing of his firm’s mutual funds.
Pilgrim Baxter & Associates Founders Gary Pilgrim and Harold Baxter face civil charges of facilitating illegal trading of their firm’s mutual fund shares to benefit favored investors . The complaint alleges Mr. Pilgrim helped establish the hedge fund Appalachian Trails, which conducted market timing of Pilgrim Baxter mutual fund shares.
Mark A. Beeson in October resigned as chairman of Bank One’s One Group of mutual funds in connection with his ties to Canary Capital and his role in allowing Canary to conduct late trading and market timing. Mr. Spitzer’s complaint alleged Security Trust introduced Mr. Beeson to traders at Canary.
Bank One fired Security Trust Co. as administrator for its One Group of mutual funds, saying Security Trust had failed to reassure bank officials that it followed proper procedures in processing One Group mutual fund trades.
In an Oct. 20 letter to Security Trust Co. partners, Tom Plumb, who took over as CEO following Mr. Seeger’s resignation, sent letters to all mutual fund companies with which Security Trust did business, certifying that so far as company officials could determine same-day and late-day trades were received by record keepers or other intermediaries before the markets closed on the days the trades were submitted.
“We regret that One Group Mutual Funds have chosen not to accept this certification,” Mr. Plumb wrote.
In that same letter, Mr. Plumb wrote that Security Trust had taken other steps to address concerns about its role in the Canary scandal, including hiring the Grand Rapids, Mich. law firm Warner Norcross & Judd LLP to conduct an independent investigation, hiring KPMG LLP, New York, to review the company’s mutual fund trade procedures and processes and hiring new executives.
Mr. Seeger left Security Trust Oct. 5 after the company’s board heard the preliminary findings of Warner Norcross & Judd’s investigation and demanded his resignation. Mr. Kenyon was fired Oct. 29, and Ms. McDermott was fired on Oct. 30, according to a chronology posted on Security Trust’s web site.
Published reports said the three helped disguise mutual fund share trades submitted to Security Trust after daily market closings, thus allowing the traders to exploit the difference between the mutual fund share prices at the close of business and the value of the securities held by the mutual fund.
The underlying securities that comprise mutual funds often trade after hours, and their prices can be affected by news and events that take place after the markets close. However, most retail investors cannot buy or sell mutual fund shares after hours, which means that for them the mutual fund share price at the end of the day holds until the opening of business the next day, no matter what the prices of the underlying securities do in the interim.
Mr. Spitzer alleged that Security Trust abetted late trading that cost mutual fund investors upwards of US$1 million. If convicted of the criminal charges, all the three ex-Security Trust officers face between 8 1/3 and 25 years in prison, according to a statement from Mr. Spitzer’s office.
“Pervasive misconduct must be met with appropriate sanctions,” Mr. Spitzer said. “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.”
In separate releases, officials at both the SEC and the Office of the Comptroller of the Currency credited Mr. Spitzer with first implicating Security Trust and its officers, which led to subsequent investigations by the SEC, the OCC and the U.S. Department of Labor.
As part of the dissolution order, Security Trust will be required to transfer its customer accounts to other third-party administrators that do not have ties to Security Trust, OCC spokesman Dean DeBuck said. Security Trust’s majority shareholder, Capital Management Investors Holdings Inc., Chicago, will be required to make sure Security Trust has enough capital to conduct business through the dissolution and that client assets can be transferred without disruption, Mr. DeBuck said.