Complaint Shows Brokers' Role in Market-Timing

Most investors are aware of the secret agreements that enabled a handful of savvy traders to run abusive trading strategies in many of the country's best-known mutual funds.

Now, a newly filed complaint suggests that the efforts of stockbrokers acting on behalf of would-be market-timers and late traders were more pervasive than previously believed, often representing a second, unwelcome front for funds that had friendly timing agreements in place with other clients.

The Securities and Exchange Commission, in one of the most detailed civil complaints yet filed against any defendant in the mutual fund investigation, alleges that five former Prudential(PRU) brokers defrauded 52 fund companies by making more than $1.3 billion in market-timing trades over three years. The complaint details the brokers' efforts to hide behind dozens of false accounts to conceal abusive trading and circumvent attempts to root them out.

The SEC, which was ordered last month by a federal judge to expand on a complaint it first filed in November, contends that all of the fund companies were victims of the brokers and in many instances took steps to try and stop them from doing more trades. The irony is that some of the victimized fund families -- Janus(JNS), Alliance Capital(AC), Franklin Templeton(BEN) and Marsh & McClennan's(MMC) Putnam Investments -- are ones that were either charged by the SEC and New York Attorney General Eliot Spitzer with knowingly allowing traders to market-time shares of their funds, or are under investigation.

The complaint also alleges, for the first time, that some funds sold by Fidelity Investments, the nation's biggest mutual fund company, also were timed. The Fidelity funds were timed despite a series of steps taken by the Boston-based firm to keep abusive traders out of its funds, if not necessarily the funds of other companies that were sold on Fidelity's big mutual fund trading platform.

If anything, the new 67-page complaint, which includes hundreds of pages of exhibits, demonstrates just how widely practiced market-timing was in the mutual fund industry, and the lengths to which some traders and brokers would go to score easy profits. It also shows how the complaints from fund companies to a brokerage, in this case Prudential, could fall on deaf ears.