SEC Files Suit Against Simpson Capital

According to the SEC, the late trades enabled the firm to buy, redeem or exchange mutual fund shares after the market closed while still receiving the current day's mutual fund price, otherwise known as the "net asset value."

Simpson and Dowling allegedly used five separate broker-dealers to place more than 10,700 trades in over 375 mutual funds after the market closed, the SEC said.

The broker-dealers included Kaplan & Co. of Boca Raton, Fla., Wall Street Access of New York and three "introducing" broker-dealers, which cleared trades through the brokerage arm of Bank of America(BAC Quote) and a unit of Bear Stearns(BSC Quote), the SEC alleges in the complaint.

In addition, Robert Simpson, who was an investor in the two hedge funds, personally earned at least $19 million through fees and profits, while Dowling received nearly $1 million in salary and bonuses from the scheme, the SEC said.

The agency is seeking permanent injunctions, disgorgement of all ill-gotten gains and civil fines from Simpson Capital.

Dowling's attorney denied the charges in a statement sent to TheStreet.com. An attorney for Simpson did not return a phone call seeking comment.

Interestingly, Simpson developed the trading strategies by working with his brother-in-law at the time, Edward Stern of Canary Capital Partners. Canary was the poster child for abusive mutual fund trading, as it was the first firm slapped with a complaint from Spitzer in 2003.