Updated from 12:04 p.m. EST
Millennium Partners, Israel Englander's $5 billion hedge fund, agreed to pay $121 million Thursday to settle charges that it used abusive trading strategies to harvest millions of dollars in tainted profits from mutual funds.
Englander, the storied arbitrager and onetime partner of Boesky-era trading legend John Mulheren, will pay an additional $30 million in civil penalties. Two management companies he controls will pay $27 million more. The $180 million settlement was announced Thursday by New York Attorney General Eliot Spitzer and the
Securities and Exchange Commission.
Many of the details of Millennium's involvement in the mutual fund scandal were first reported by
TheStreet.com, including early
trepidation among its investors
when the scandal broke, word that it had
set up a legal reserve
to cover a settlement, and a bizarre scheme to game variable annuities involving
phony doctor's visits.
The size of the penalty is higher than the $100 million that most had anticipated and Millennium had set aside money for in the early days of the scandal. It's also far more than the $40 million penalty Edward Stern and his Canary Capital Partners paid in the early days of the investigation.
But securities regulators said the stiff penalty was warranted because Millennium had designed "multiple schemes'' for engaging in abusive mutual fund trading -- specifically the marketing timing, or frequent trading, of mutual fund shares. In the process, the fund netted millions of dollars in profits. The schemes were designed to hide Millennium's rapid-fire trading from the mutual fund companies.
At one point, market timing of mutual funds -- which tends to dilute the value of other shareholders -- accounted for 20% of Millennium's yearly returns.
"Millennium developed multiple schemes that cost mutual fund investors tens of millions of dollars,'' said Spitzer. "As a result of our investigation, those frauds have been halted, and restitution will be made to investors who were harmed.''
Terence Feeney, Millennium's chief operating officer, will pay a $2 million fine. The fund's general counsel, Fred Stone, will pay $25,000. Feeney and Stone are banned from mutual fund trading for three years.
Kovan Pillai, a trader at the fund, will pay $150,000 penalty and be banned from working for an investment advisory firm for a year.
that Englander, Feeney, Stone and a trader would all be sanctioned as part of the settlement.
The deal with Millennium comes a little more than two years after Steven Markovitz, one of the hedge fund's top traders, pleaded guilty in October 2003 to engaging in illegal late trading of mutual fund shares. The former trader, whose guilty plea came in the early days of the mutual fund trading scandal, has yet to be sentenced
In all, Millennium had four traders assigned to trading mutual funds, but Markovitz was the biggest, controlling more than $1 billion in the fund's assets.
In the settlement, the regulators did not hold Englander and his associates responsible for Markovitz's late trading, which is a strategy of buying and selling mutual funds shares at stale prices to take advantage of breaking news. In fact, the regulators said the Englander, who founded Millennium in 1989, and his associates told Markovitz to stop engaging in late trading when they learned about it early 2002.
But the regulators held Englander accountable for failing to properly supervise Markovitz when it came to late trading.
Spitzer, in his complaint, notes that "no procedure was put into place to monitor the times at which Markovitz and his assistants (or any other Millennium inside or outside market timers) were placing trades. Not surprisingly given the lack of oversight, Markovitz did not stop.''
Indeed, the regulators describe Englander as playing a significant role in orchestrating Millennium's abusive mutual fund trading. The hedge fund manager introduced Markovitz to D.C Capital, the Syosset, N.Y., brokerage that handled many of Millennium's market timing trades.
Markovitz would also use D.C. Capital to process his illegal late trades.
When mutual fund companies began to detect some of Millennium's abusive trading, regulators charge, Englander came up with various ideas to hide the activity. Spitzer alleges that Englander "suggested the use of multiple brokers and multiple accounts'' to avoid detection by the fund companies.