New York Attorney General Eliot Spitzer has filed a lawsuit against a leading hedge fund and others for engaging in a fraudulent mutual fund market-timing scheme that damaged long-term investors.
The defendants -- Samaritan Asset Management Services, Inc., Johnson Capital Management, Inc., and their principals, Edward T. Owens and Michael A. Johnson are accused of engaging in a deceptive practice known in the industry as "flying under the radar" of monitoring systems established by mutual funds to detect market timing.
Most egregiously, the defendants allegedly disguised their timing activities from the various targeted mutual fund families by attaching or "piggybacking" their trades on the investment accounts of retirement plans that were customers of Security Trust Company (STC), a trust company and national banking association located in Arizona.
One way that STC and Johnson Capital evaded the scrutiny of mutual funds was to purposely vary the amounts of the trades. On Oct. 22, 2001, for example, an STC employee sent an e-mail advising Johnson Capital to employ this device as means to conceal its market timing activity.
"When trading the piggy back accounts, try to adjust the buy and sell amounts. Meaning, do not complete the sell trades for the same amount as the buy trade from the previous day. Same with [exchanges], do not use the same amount--vary each in and out trade. ... This will assist us in trying not to bring attention to the trading."
The lawsuit seeks to enjoin the defendants from conducting deceptive timing in mutual funds and restitution of monies obtained by their fraudulent acts.
As a result of a related investigation, Grant Seeger, the CEO of STC pleaded guilty in 2005 in New York County Supreme Court to second degree grand larceny, a class C felony, and to a violation of the Martin Act, a class E felony.
STC President William Kenyon pleaded guilty to a felony violation of the Martin Act.