Michael Sassano, one of Wall Street's most successful mutual fund brokers, is being formally investigated by at least six agencies over allegations he helped clients at
Oppenheimer & Co.
carry out abusive trading strategies, including the illegal practice of buying and selling funds at stale prices after the market closed.
The investigation by the
Securities and Exchange Commission
, federal prosecutors and state regulators was disclosed Thursday on Sassano's brokerage registration statement. Oppenheimer & Co., the 33-year-old broker's current employer, says it was officially notified of the investigation on March 30.
The disclosure is the first official confirmation that Sassano, who at the pinnacle of his success grossed between $10 million and $15 million a year in trading commissions, is being investigated by multiple state and federal regulatory agencies. It is the first time he has been mentioned in connection with late trading of mutual funds.
reported five months ago that regulators were probing Sassano, whose long list of clients included many of the hedge funds that have been implicated in the far-reaching mutual fund trading scandal. He has also attracted interest because regulators found that Sassano frequently referred business to top brokers at other Wall Street firms that were involved in abusive mutual fund trading.
reporting showed how the broker
rang up huge paydays by matching clients with funds that were amenable to market-timing strategies and chronicled his
own role at a market-timing hedge fund.
The confirmation of the investigation comes as Oppenheimer takes steps to put distance between itself and Sassano, whose name first surfaced last fall in connection with the investigation of group of former
brokers in Boston.
Sources familiar with Sassano say his 15-member cadre of junior brokers, clerks and traders has been disbanded. Several member of Sassano's group recently left the firm, and Sassano himself has been suspended from doing any further work for the firm. In February, Sassano changed his official place of work from Oppenheimer's office in lower Manhattan to his parents' home in Mirimar Beach, Fla.
In fact, Sassano, who hasn't reported to work on a regular basis for months, has been spending much of his time in Russia with his girlfriend, sources say.
Top executives at Oppeneheimer repeatedly declined to comment about Sassano. Sassano's attorney, Ira Lee Sorkin, could not be reached for comment. Sassano hasn't responded to numerous efforts to contact him.
The list of agencies investigating Sassano includes the SEC, the Justice Department, the NASD, the
New York Stock Exchange
and state regulators in New York and Massachusetts.
Sassano's list of hedge fund clients, sources say, included
Chronos Asset Management
of Cambridge, Mass.; British-based
Head Start Advisors
Pentagon Capital Management
; and Illinois-based
Samaritan Asset Management
. Sassano also was an investor in
Atlantique Capital Advisors
, a Garden City, N.Y. fund that specialized in the market-timing, which Sassano helped start.
People familiar with Sassano say his mutual fund trading activity was never kept secret from top managers at Oppenheimer and the investment banking division of
Canadian Imperial Bank of Commerce
, which used to own Oppenheimer. Sources say Sassano's team members were the only brokers at Oppenheimer permitted to engage in mutual fund market timing.
In fact, sources say, mutual fund families that wanted Oppenheimer brokers to sell their funds to retail investors were often told to talk to Sassano about the possibility of allowing his wealthy hedge fund customers to market time shares of those same mutual funds. (Oppenheimer & Co. is unrelated to Oppenheimer Funds.)
Market-timing, or frequent trading of mutual fund shares, technically is a legal trading strategy. But it's prohibited under most mutual fund prospectuses because it can dilute the value of a portfolio's holdings.
Several people who know Sassano say they weren't aware of any specific allegations involving illegal late trading of mutual fund shares.
Late trading is considered a particularly bad offense, because it enables a favored customer to buy shares of a mutual fund after their 4 p.m. closing price in order to take advantage of late-breaking, market-moving news. Normally, orders received after 4 p.m. are supposed to be treated as next-day trades to avoid giving an unfair advantage to a trader.
The Sassano investigation, meanwhile, is closely tied to a parallel inquiry being conducted by New York Attorney General Eliot Spitzer and the SEC into CIBC, which provided up to a $1 billion in financing used by hedge funds for potentially illegal mutual fund trades. Many of the hedge funds that received financing through CIBC were customers of Sassano.
In early 2003, CIBC sold its Oppenheimer brokerage division, including Sassano's timing group, to
for about $241 million. Toronto-based Fahnestock, long an industry also-ran, junked its name in favor of the Oppenheimer brand, which had more cache.
Earlier this year, prosecutors in Spitzer's office indicted former CIBC investment banker Paul Flynn on grand larceny charges stemming from allegations he knowingly provided financing to Samaritan, Canary Capital Partners and other hedge funds, which used that money to engage in illegal late trading and market timing.
Market-timing and late trading are the two main trading abuses regulators have been focusing on in their sweeping investigation of the $7.6 trillion mutual fund industry.
To date, nearly a dozen mutual fund families have been sanctioned in the inquiry, paying a total of $2 billion in fines, restitution and fee reductions. But regulators are just beginning to turn their attention to the brokers, hedge funds and Wall Street trade-processing firms that orchestrated those trades.