A former mutual fund executive pleaded guilty to a felony for trying to cover up improper trading of mutual funds, the latest in a widening investigation of industry practices prosecutors say costinvestors billions of dollars.
James P. Connelly Jr., former vice chairman and chief mutual fund officer at Fred Alger & Co., went as far as appointing an employee to serve as Alger’s “timing police,” to bust investors caught making short-term, in-and-out trades without his permission, the Securities and Exchange Commission said. The practice, known as “market timing,” constituted fraud, as it was not disclosed to Alger fund shareholders, the SEC said.
Connelly pleaded guilty Thursday in state Supreme Court in New York to tampering with physical evidence and agreed to pay a $400,000 civil penalty to settle related charges by the SEC. Connelly faces up to four years in prison when sentenced Dec. 17. Connelly, 40, of Hoboken, N.J., also is barred from the industry for life.
New York Attorney General Eliot Spitzer said Connelly deceived his firm’s lawyers by withholding documents and directing employees to delete some e-mails subpoenaed by investigators. The indictment said Connelly also tried to conceal trading arrangements between his firm and Veras Investment Partners, a Texas hedge fund.
Connelly is the first mutual fund executive charged in the investigation. Two traders at other companies have been charged.
The SEC said Connelly permitted more than a dozen select investors to “time” trades in Alger funds, a practice the company did not disclose to investors in its fund prospectuses. In return, the investors agreed to keep substantial assets in Alger funds.
Market timing allows investors to exploit changes in prices and can hurt other mutual fund shareholders by diluting the value of their shares. Many funds prohibit the practice.
“By approving timing arrangements with select investors, Mr. Connelly put his own firm’s bottom line ahead of the interests of the fund shareholders he was entrusted to protect,” SEC enforcement director Stephen Cutler said. “Such conduct is a fundamental breach of an investment adviser’s fiduciary’s duties and warrants tough sanctions.”
In a statement late Thursday, Alger President Daniel Chung said Connelly was suspended Sept. 29. He was fired last week after an internal investigation turned up evidence that led to Thursday’s arrest, Chung said.
“Mr. Connelly’s misconduct was completely out of character for this firm and the personal commitment we made to the government to be fully cooperative,” Chung said. “Fortunately, we believe all documents were preserved.”
On Friday, Alger announced it was banning the practice of market-timing from its funds, with Chung saying that the firm wanted to “assure that all mutual fund investors are on the same level playing field – no matter how big or small they are.”
Connelly’s home telephone number wasn’t available.
Veras confirmed Thursday it had received subpoenas Spitzer and the SEC and said it is cooperating.
“The scope of the investigation into illegal trading practices in the mutual fund industry continues to expand,” Spitzer said. “Any obstruction of this investigation will be dealt with swiftly.”
On Sept. 3, Spitzer accused hedge fund Canary Capital Partners LLC of illegal trading involving Bank of America, Janus, Bank One Corp. and Strong Financial Corp. funds. The same day, Canary Capital Management and its managers agreed to pay $30 million in restitution for profits generated from improper trading, plus a $10 million penalty to settle Spitzer’s allegations. The hedge fund neither admitted to nor denied wrongdoing in the settlement.
Earlier this month, Steve Markovitz, a former broker with Millennium Partners hedge fund, pleaded guilty to a felony charge for illegal late trading of mutual fund shares.
Spitzer has also charged a former Bank of America broker, Theodore Sihpol III, with larceny and securities law violations in connection with the Canary case. Sihpol has pleaded innocent.
Merrill Lynch & Co., Alliance Capital Management Holding LP, and Prudential Securities have suspended or fired nearly two dozen employees believed to have engaged in market timing or illegal late trading.
Late trading involves allowing an investor to trade funds at the 4 o’clock prices hours after the market closed. Such arrangements allow the investor to cash in on after-hours news ahead of other investors, who at that hour would be forced to chance buying at the next day’s closing price.
Spitzer said the practices costs investors billions of dollars.
