McDonald Investments Fires Brokers Amid Probe - TheStreet

A McDonald Investments office in Chicago was closed last week and several of its brokers fired amid an internal probe of the branch, people familiar with the situation said.

The office, which employed 10 brokers and a handful of other staff, was shuttered Dec. 4.

Michael Monroe, a McDonald spokesman, confirmed the office's closing. He said at least seven of the brokers were either fired or asked to resign because they violated the firm's policy with regard to "doing due diligence on clients.'' He declined to elaborate.

The closing of the Chicago office comes as the brokerage fields inquiries from federal regulators about its mutual fund trading practices. McDonald currently is conducting an internal review to see whether any of its brokers engaged in improper mutual fund trading, but that review has not been completed.

But trading sources told

TheStreet.com

that at least three of the former brokers in the Chicago office had been involved in mutual fund market-timing on behalf of a number of hedge funds. McDonald, based in Cleveland, is a unit of

KeyCorp

(KEY) - Get Report

, which does investment banking and brokerage services mostly for wealthy and institutional clients.

Market-timing is a legal but frowned-upon strategy in which savvy investors rapidly buy and sell fund shares to capitalize on discrepancies in different markets. The practice has been at the center of investigations by New York Attorney General Eliot Spitzer, the

Securities and Exchange Commission

and the Justice Department into the $7 trillion mutual fund industry.

Most of the prosecutions over market-timing thus far have been aimed at fund managers who violated their company's policies and their fiduciary obligation to their investors by permitting big clients to engage in abusive trading. The only brokers who have run into trouble with regulators over market-timing is a group from

Prudential Securities

, which allegedly used a deceptive scheme to help its customers place market-timing trades. (Prudential is jointly owned by

Wachovia

(WB) - Get Report

and

Prudential Financial

(WB) - Get Report

.)

But other Wall Street firms, including

Bear Stearns

(BSC)

,

Merrill Lynch

(MER)

,

Citigroup

(C) - Get Report

and

UBS

(UBS) - Get Report

, all have fired brokers who were found to have helped hedge funds and other wealthy customers engage in market-timing. Many of those firms have received subpoenas or inquiries from regulators and prosecutors heading up the mutual fund investigation.

Rapid-fire trading is harmful for the vast majority of mutual fund investors because it can dilute the value of a fund by driving up trading and administrative costs. As a result, most fund companies disclose in their prospectuses that they engage in various protective activities designed to ferret out and stop market-timers.