Daniel Calugar, the Florida lawyer who rode an obscure trading technique to hundreds of millions of dollars in profits, will pay the biggest penalty of any individual in the three-year-old mutual fund trading scandal.
In a tentative settlement with securities regulators, Calugar agreed to pay $153 million in fines and restitution to settle allegations that he engaged in abusive trading.
The proposed settlement between Calugar and the
Securities and Exchange Commission
must still be approved by a Nevada federal court judge. The SEC has been hot on the trail of Calugar since December 2003, when regulators went to court to freeze more than $500 million in assets controlled by his now-defunct Las Vegas-based Security Brokerage.
"The magnitude of the settlement reflects both the seriousness of the wrongdoing and the commission's resolve to hold accountable those who defraud mutual fund shareholders,'' said Linda Thomsen, the SEC's director of enforcement.
Before Calugar's settlement, the top penalty paid by any individual in the mutual fund scandal was $80 million, a sum assessed against former investment advisers Harold Baxter and Gary Pilgrim. Calugar's penalty is more than many brokerages and mutual fund firms have paid.
In the world of mutual fund arbitrage, the 51-year-old Calugar stood apart both in the size of his profits and the creativity of his subterfuge.
Working with just a handful of employees, Calugar managed to turn Security Brokerage into a personal boiler room for pursuit of ethically questionable mutual fund trading. Regulatory records reveal that the small brokerage, established in 1996, never had any retail customers and did little, if any, stock trading for the public. Most of the trading was done for Calugar's own account.
In earlier court filings, the SEC alleged that Calugar was both a prolific late trader and market timer in funds offered by a number of mutual fund families, including Massachusetts Financial Services, a division of
Sun Life Financial
. Regulators also charged Calugar negotiated a number of secret market-timing deals with officials
, parent company of the Franklin/Templeton funds.
In the mutual fund investigation, late-trading has emerged as the most serious offense, sometimes qualifying for criminal treatment. Late-trading involves buying shares of a mutual fund after their 4 p.m. closing price in order to take advantage of late-breaking, market-moving news.
Market-timing, a rapid-fire system of mutual fund trading designed to capitalize on price discrepancies in different markets, is legal but frowned upon. Regulators have charged traders with securities fraud when they used deception to conceal their market-timing activities from mutual fund companies.
The mutual fund scandal is not the first time Calugar made news. He got his first 15 minutes of fame about a decade ago when he went on national TV looking for a wife.
first reported, Calugar appeared on a CBS national news program in 1994 focusing on "millionaire bachelors" looking for love. On the show, Calugar talked about a personal ad he had placed in
magazine, offering to pay $100,000 to "the person who introduces me to the woman I marry."
In reality, Calugar's roguish trading is costing him much more than $153 million. He previously paid $72 million to settlement claims filed against him in a class action lawsuit brought on behalf of mutual fund investors.
In all, he's paying $225 million. That's just $25 million less than the $250 million
( BSC) agreed to pay the SEC to settle allegations it processed and financed abusive mutual fund trades for more than a dozen hedge funds and small brokerages.
But it could have been much worse for Calugar.
The SEC, in court filings last year, estimated Calugar's ill-gotten gains at $285 million. But regulators said the actual figure could be much higher. In one document, regulators suggested that Calugar could be ordered to pay as much as $570 million in fines and restitution.
To date, regulators have collected nearly $3 billion in fines and restitution in the long-running investigation.