Complaint Shows Brokers' Role in Market-Timing

Four of those hedge funds, Chronos, Headstart, Pentagon and Jemmco, were referred to Druffner by his college buddy, Oppenheimer's(OPY) Michael Sassano, one of Wall Street's most successful market-timing brokers, according to regulators and people familiar with the inquiry. Sassano regularly referred customers to Druffner while Oppenheimer was still owned by CIBC, one of the banks that provided funding the hedge funds.

Sassano, himself the subject of an investigation by the SEC and other regulatory agencies, isn't named in the complaint, nor has he been charged with any wrongdoing. But people familiar with the investigation say regulators have made inquiries into Sassano's customer referrals to Druffner, since the brokers worked for rival firms, even though they were friends on a personal level.

Michael Collora, an attorney for Druffner, and another defendant, Skifter Ajro, says his clients did nothing wrong and "adhered to the letter of any bloc imposed by a mutual fund." He says, "there is no statute, regulation or case forbidding" market-timing.

But regulators portray Druffner and his colleagues as being almost ruthless on behalf of their customers, often using multiple accounts to place identical trades in shares of the same mutual fund. The multiple accounts "all bore fictitious entities that had no relation to the client's actual name." The SEC also contends the hedge funds were aware of the brokers deceitful strategies and "exchanged emails" discussing their plans.

"By splitting up a client's transactions into numerous smaller components, submitted under fictitious names using different (broker identification) numbers, the brokers significantly increased the chances that the transactions would evade detection by the fund companies," the complaint says.

The SEC contends the market-timing didn't end until after Wachovia(WB) reached an agreement to buy a majority stake in Prudential Securities from Prudential Financial(PRU) in summer 2003.

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