One of the darkest realms of the mutual-fund trading scandal was laid bare Wednesday as state and federal prosecutors detailed how a Toronto financial company served as broker, banker and back office in a hedge fund scheme that victimized thousands of retail investors.
Canadian Imperial Bank of Commerce
agreed to pay $125 million to settle the charges, which included fraud and deceptive business acts. The allegations cover a five-year period in which dozens of hedge funds used the bank's money and connections to make abusive trades that resulted in huge profits to them but diluted other investors' overall returns.
From 1998 to 2003, regulators say, CIBC lent up to $2 billion to such traders, generating more than $75 million in fees. The bank neither admitted nor denied guilt in the settlement.
Securities and Exchange Commission
and New York Attorney General Eliot Spitzer, in separate legal filings, alleged that CIBC's mutual fund violations encompassed employees from its investment bank and former CIBC Oppenheimer brokerage arm. The regulators contend the activities were known and approved by at least half a dozen senior executives in the brokerage group.
People familiar with the investigation say civil charges could still be filed against former CIBC employees within the next few weeks, notwithstanding the bank's settlement Wednesday.
previously reported that several current and former employees of
Oppenheimer & Co.
, which purchased CIBC's brokerage arm in January 2003, were notified by regulators that they could be charged in the investigation.
The settlement with CIBC comes as former CIBC investment banker Paul Flynn awaits trial on trial in a New York criminal court for his part in arranging most of the financing deals. A little more than year ago, Spitzer's office charged that Flynn's banking team provided financing to help at least two hedge funds,
Samaritan Asset Management
and the now-infamous
Canary Capital Partners
, engage in illegal late-trading of mutual fund shares.
But judging from complaints filed Wednesday by the SEC and Spitzer's office, regulators' main focus is a former CIBC Oppenheimer broker named
Michael Sassano, whose
dealings with abusive mutual fund traders has been
chronicled extensively on this Web site over the past 18 months. In fact, Sassano's name appears on about half of the 74 pages in Spitzer's complaint.
Bringing a case against the Sassano group has been one of the unfinished pieces of business in the mutual fund scandal, which to date has collected more than $3 billion in fines and restitution from 13 mutual fund companies and brokerage firms.
Regulators allege in the CIBC complaints that Sassano and his 10-employee team engaged in both market-timing -- the frequent trading of mutual fund shares -- and illegal after-hours trading for hedge fund clients.
The complaint filed by Spitzer notes that Sassano, along with several members of his team, asserted their Fifth Amendment right against self-incrimination and refused to answer questions concerning market-timing and late trading during the course of the investigation.
Ira Lee Sorkin, the attorney for Sassano and some of his former team members, including Dogan Baruh, Sassano's main trader, says, "We deny any violative conduct," adding that "all activities engaged in were known, disclosed to and approved by senior management."
Spitzer alleges that Sassano's group engaged in various degrees of deception to hide their abusive trading from dozens of mutual fund families. The Sassano team was the only group of brokers at CIBC allegedly permitted to engage in abusive mutual funding trading for hedge funds and in the process generated $40 million in commission from 1998 to 2002.
Spitzer's lawyers describe Sassano as one of the largest producers at CIBC Oppenheimer. His market-timing prowess earned him a promotion to managing director and an office "on the same floor as the senior most executives at CIBC Oppenheimer instead of with the branch manager and other brokers in Sassano's branch." (CIBC Oppenheimer isn't related to Oppenheimer Funds.)
Not only did Sassano recruit hedge funds that wanted to trade mutual funds, he introduced them to Flynn so they could get financing to place even bigger trades. Regulators contend the kind of financing provided by Flynn's team permitted the hedge funds to evade the normal limits for buying stocks with borrowed money.
Flynn's team even provided financing to a hedge fund in which Sassano and his family had money invested,
Atlantique Capital Advisors
previously has reported that Sassano
helped establish Atlantique, which was created specifically to engage in market-timing.
Earlier this year, Massachusetts regulators charged that
( AGE) brokerage office in Boston used deceptive techniques to conceal its market-timing trades for several hedge funds, including Atlantique.
The combination of Sassano and Flynn proved to be big business for CIBC. But their efforts also created problems. The more business they did, the more complaints CIBC received from the mutual fund companies. In all, CIBC officials received more than 1,000 letters and emails from mutual fund companies complaining about Sassano's trading, the complaint notes.
Rather than rein in Sassano and Flynn, regulators charge that CIBC executives gave them permission to use a number of deceptive strategies to maximize their efforts. They included the use of multiple accounts to hide the identities of the hedge funds placing trades and the creation of corporate subsidiaries to deflect attention from CIBC.
According to the complaint, Sassano also set up accounts with
( SCH) so his group could get access to funds sold through those firms' so-called "mutual fund supermarket platforms.'' These platforms allegedly provided Sassano and his team another opportunity to disguise their abusive trading.
"Mutual funds were begging them to stop, but they just made a decision that this was just too profitable of a business to pass up,'' says Kay Lackey, an assistant regional director in the SEC's New York office.
Once regulators busted CIBC, the bank turned cooperative. Regulators say the bank's cooperation factored into the size of the penalty.
Lackey and David Brown, Spitzer's head of investment protection, declined to comment on any potential charges against Sassano and others identified in the complaints. Both said the investigation is continuing.