Canary Capital's Broker Could Face Criminal Charges

New York Attorney General Eliot Spitzer is weighing criminal charges against Security Trust, an Arizona investment firm caught in the crosshairs of the mutual fund trading scandal.

A source in Spitzer's office said prosecutors have determined that Security Trust's conduct in the mutual fund scandal is criminal in nature. But Spitzer has decided to give the brokerage an opportunity to explain its actions and demonstrate why it should only face civil liability.

Early on in the fast-spreading mutual fund scandal, Spitzer's office identified Security Trust as an outfit that assisted several hedge funds in engaging in improper trading in shares of various mutual funds.

The firm is named but not charged in the $40 million settlement Spitzer's office reached with the Canary Capital Partners hedge fund. Canary allegedly had a deal with Security Trust that enabled it to make improper trades in shares of hundreds of mutual funds. In exchange, Security Trust allegedly received a cut of Canary's illicit profits, according to a civil complaint filed in September by Spitzer's office.

A criminal charge against Security Trust would do serious harm to its business and likely drive away customers, which include brokerages, money managers and mutual fund companies.

To date, no financial services firm has been charged with criminal activity in the mutual fund scandal. But earlier Tuesday, the Securities and Exchange Commission and Massachusetts regulators filed civil securities fraud charges against Putnam Investment, a division of Marsh & McLennan(MMC), in a separate mutual fund trading investigation.

Nancy Murphy, a Security Trust spokeswoman, declined to comment, saying she was not aware Spitzer's office had made any determination about the company's potential criminal liability. She said the company has been cooperating with the investigation.

But Security Trust has been in turmoil ever since Spitzer's office reached a deal with the Canary hedge fund. The trading scandal forced Grant Seeger, the company's former chief executive officer, to resign on Oct. 5. A few days later, Bank One's(ONE) mutual fund unit stopped doing business with Security Trust.