Did Lawyers Sign Off on Late Trading?

An attorney familiar with this legal thinking said that because few mutual funds are actually priced at 4 p.m., it's debatable whether that's the true deadline for submitting all orders to buy and sell.

Indeed, the mutual fund industry itself implicitly has acknowledged that the price forward rule prohibition on late trading may not be as airtight as prosecutors contend.

In response to the trading scandal, the Investment Company Institute, the lobbying arm of the mutual fund industry, is recommending that the SEC amend the price forward rule and other relevant trading regulations to "to support a firm 4 p.m. deadline for all mutual fund trades to be reported to mutual fund companies." This firm 4 p.m. deadline for submitting and executing trades would effectively close the 90-minute window that some lawyers contend exist under the current rule.

But even if the current price forward rule allows for a 90-minute late-trading window, an advice-of-counsel defense may not be a panacea for brokers and fund managers being investigated by prosecutors. The defense falls apart if the defendant misrepresents his intentions to his lawyer.

In fact, people familiar with the investigation said they aren't aware of any lawyers giving the green light to trading after 5:30 p.m. Yet, as the mutual fund scandal already has shown, some hedge funds -- Canary, for instance -- were indeed making trades well after 5:30 p.m.

"If you do not fit those set of facts, the legal opinion is of no value to you as a defense," said an attorney familiar with the investigation.

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