Mutuals.com, a Dallas-based investment adviser and registered broker dealer, allegedly helped institutional brokerage and advisory clients carry out thousands of market-timing and illegal late trades in mutual fund shares, the
Securities and Exchange Commission
alleged in a civil complaint Thursday.
The SEC also filed civil charges against the firm's chief executive, Richard Sapio, its president, Eric McDonald, its compliance officer, Michele Leftwich, and two affiliated broker-dealer firms: Connely Dowd Management and MTT Fundcorp.
"The defendants used a whole host of methods to try to mask their illegal market timing and late trading," said Stephen Cutler, director of the SEC's division of enforcement. "These efforts at concealment illustrate the lengths to which the defendants were willing to go to continue enriching themselves at the expense of long-term mutual fund investors."
The SEC alleges that between July 2001 and September 2003, hundreds of mutual fund firms and two clearing companies warned Mutuals.com that its market-timing activities were improper. By September, roughly 294 mutual fund companies had banned or restricted Mutuals from trading in their shares.
In order to circumvent these restrictions, the SEC claims that Sapio, McDonald and Leftwich "devised and perpetrated a number of deceptive acts and practices to conceal their clients' market timing activities from those seeking to restrict them."
For example, Mutuals.com and its principals formed and registered the aforementioned broker dealers, changed account numbers for blocked customer accounts and suggested that their customers use third-party tax identification numbers or social security numbers to disguise their identities, the SEC alleges.
The SEC also charged that at least during 2003, Mutuals "routinely received trading instructions from customers after 4 p.m. EST and executed those trades as if the trading instructions had been received prior to that closing time." The firm and its affiliates then attempted to conceal these activities by omitting portions of the trading information that they were required to provide to clearing agents.
Regulators consider late trading the more serious offense because it permits favored customers to buy -- or cancel an order to buy -- shares of mutual funds after the close of the trading day. The late trades enable customers to take advantage of late-breaking news because orders are processed at an old price, rather than the next day's closing price reflecting individual stocks' movement.
Market-timing, by contrast, is a legal trading strategy in which traders game the pricing system by moving quickly in and out of shares of international mutual funds, trying to anticipate the impact that late-breaking news will have on the stocks held.
The SEC is seeking permanent injunctions from further securities law violations, civil money penalties and disgorgement of illicit profits plus prejudgment interest. At the SEC's insistence, the defendants have agreed to a court-appointed special monitor for Mutuals.com, to oversee management of the Mutuals Trust mutual fund, pending the resolution of the civil litigation.
On the company's Web site, Sapio says Mutuals' mission is "to build and maintain the most respected, reliable and trusted mutual fund company in the world."
Mutuals.com is an SEC-registered broker dealer and investment adviser with 18 institutional and hedge fund clients.