Did Lawyers Sign Off on Late Trading?

Prosecutors on the hunt for scofflaws in the mutual fund trading scandal are hearing a common rallying cry from some potential defendants: "My lawyer said it was OK."

People familiar with the investigation said hedge fund traders, brokers and fund managers under scrutiny are telling investigators that their corporate lawyers signed off on their allegedly improper trading activity.

In effect, some of those under investigation contend they have a so-called advice-of-counsel defense. It's a strategy that's often employed in corporate crime cases, because it makes it difficult for prosecutors to prove a person had the necessary criminal intent to break the law.

Said one corporate lawyer, who is familiar with the investigation but didn't want to be identified, "In theory the advice of counsel is a good defense because it shows a person had no intent to commit a crime."

An emerging advice-of-counsel defense could prove especially problematic for the investigation into allegations of late trading, an activity in which a mutual fund company permits a favored customer to buy shares that were priced prior to the release of market-moving news.

Late trading has emerged as one of the most serious offenses prosecutors and regulators are examining in the quickly expanding investigation into the $7 trillion mutual fund industry. New York Attorney General Eliot Spitzer, who is leading the investigation, contends that after-hours trading is a crime and has compared it to betting on a horse race after the winner has crossed the finish line.

So far, allegations of late trading have surfaced in investigations of Bank of America(BAC), Fred Alger Management, Security Trust and three hedge funds: Canary Capital Management, Millennium Partners and Veras Investment Partners.

Other fund companies, such as Marsh & McLennan's(MMC) Putnam Investments, Prudential Securities, Janus(JNS), Bank One(ONE) and Alliance Capital(AC), are being investigated over allegations of market timing -- a trading infraction that appears more likely to result in civil charges.