Canary Capital's Broker Could Face Criminal Charges

Bank One was one of four mutual fund families implicated in the Canary complaint. According to the complaint, Security Trust introduced Canary employees to some of the fund managers at One Group, Chicago-based Bank One's mutual fund business.

Security Trust, founded in 1991, hosts an electronic trading platform that permits institutional investors to trade shares of hundreds of mutual funds. Security Trust also processes these trades and serves an administrator for corporate retirement programs.

In the mutual fund scandal, according to the Canary complaint, Security Trust provided the hedge fund with a "one-stop shopping" platform to engage in both market-timing and late trading of mutual fund shares. The company also helped Canary "camouflage" its illegal trading activity.

Market-timing is an arbitrage strategy that enables savvy traders to take advantage of the time differences between the closing of U.S. and foreign exchanges. While it is technically legal in many situations, most mutual funds say they prohibit the practice because the rapid in-and-out trading can dilute the value of a fund's holdings and hurt other investors.

Late trading, by contrast, is an illegal activity in which favored customers are allowed to buy mutual funds that were priced prior to the release of market-moving news.

So far, Spitzer's office has won two criminal convictions in the mutual fund trading investigation.