It's going from bad to worse at
Miami federal prosecutors on Friday announced that a grand jury has indicted the brokerage and several top executives on charges stemming from a conspiracy to commit late trading and market-timing of mutual fund shares.
The indictment charges that Kautilya "Tony" Sharma, Geek's president, and Neal Wadhwa, a brokerage employee, placed abusive mutual fund trades for customers with over $100 million in assets at the firm.
In an earlier indictment, prosecutors charged that the Boca Raton, Fla., brokerage was being used as the front for a fraudulent stock loan scheme that defrauded investors who pledged stock as collateral for loans. The filing of the new 36-count superseding indictment comes two weeks after the
Securities and Exchange Commission
, in a civil fraud complaint, alleged that Geek "consummated thousands" of market-timed and late trades for nine unnamed hedge funds.
This is the second time federal prosecutors have filed criminal charges against executives at a brokerage firm over abusive mutual fund trading. In March, federal prosecutors in New York filed criminal charges against the three top brokerage executives at
for allegedly establishing a deceptive system to permit hedge funds to market-time shares of mutual funds.
The criminal prosecutions of Geek and Mutuals.com, based in Dallas, are an indication that federal prosecutors may be taking a more active role in the mutual fund trading investigation, which New York Attorney General Eliot Spitzer initiated last September. To date, Spitzer's office has either filed criminal charges against or secured convictions of eight people in its investigation of abusive trading.
Market-timing, or frequent trading of mutual fund shares, is legal. But it is prohibited under most mutual fund prospectuses, because it can dilute the value of a portfolio's holdings. The SEC and federal prosecutors have filed fraud charges against market-timers and their brokers when there's evidence that a high degree of deception was used to mask the abusive trading activity.
Late trading, meanwhile, is an illegal practice in which someone buys shares of a mutual fund after their 4 p.m. closing price in order to take advantage of late-breaking, market-moving news.
The Geek indictment also names Charles "Joe" Kerns and Lewis Hodge as defendants. The two men are charged with taking part in the fraudulent stock loan scheme. Sharma also is charged in connection with that alleged fraud.