A West Coast lawyer rang up $175 million in profits by abusing the mutual fund pricing system with the help of an obscure Las Vegas brokerage that he controlled, the
Securities and Exchange Commission
The agency brought an enforcement action against
Security Brokerage Inc.
and its majority owner, Daniel Calugar of California, alleging they fraudulently exploited mutual funds through two schemes -- late trading and market-timing. Calugar allegedly did most of his profiteering in mutual funds managed by
Massachusetts Financial Services
. Indeed, he was said in a separate complaint to be the biggest of Alliance's market-timing customers.
A federal judge in Nevada froze the assets of Calugar and Security Brokerage Inc. after learning Calugar was transferring $50 million out of his account with MFS.
Since Calugar controlled Security Brokerage, and since it is self-clearing, it was no trick for him to dummy up predated trading slips for transactions that took place after 4 p.m. ET, the SEC alleged.
Late trading is an illegal way of making sure-thing bets on mutual fund shares by purchasing them after they are priced at 4 p.m. ET. Market-timing is a legal but frowned-upon strategy of making rapid-fire trades in a fund to take advantage of pricing discrepancies in different markets. Both have been targeted in high-profile investigations by New York Attorney General Eliot Spitzer and the SEC.
"Calugar's market-timing and late trading were phenomenally profitable to him and came at the expense of long-term mutual fund shareholders," the agency said in a release. "By obtaining a court order freezing Calugar's assets, the commission has taken action to preserve funds to be returned to the victims of his illegal schemes."
In order to market-time the Alliance shares, the SEC alleged, he agreed to make long-term investments in the company's hedge funds. MFS turned the same deal down, but Calugar nevertheless was able to time its shares.