New York Attorney General Eliot Spitzer rocked the mutual fund world this fall with the revelation that four fund firms allowed hedge fund Canary Capital Partners to engage in abusive trading within their funds. Now there may be at least one more firm to add to the Canary list.

Van Eck Funds

, a New York-based firm that manages $1.3 billion in mutual funds and hedge funds with mostly a global focus, has been subpoenaed by Spitzer's office as part of the ongoing investigation into improper trading within mutual funds, an individual familiar with the matter said. At issue: concern that Van Eck allowed Canary to make improper trades within several of its funds, said individuals close to the situation.

made repeated attempts to contact Van Eck regarding the Spitzer investigation, its potential relationship with Canary as well as suspiciously high levels of trading activity detected within some of its funds. The firm didn't respond. A spokeswoman for Spitzer's office declined to comment on the investigation, but an individual familiar with the matter said Van Eck was subpoenaed sometime after Sept. 3, the date when Spitzer first announced the problems with abusive trading practices at Canary.

According to another individual familiar with the matter, Van Eck and Canary established contact with each other regarding trading arrangements at least two years ago. Another person familiar with the situation said Canary was allowed to improperly trade certain Van Eck funds.

The nature and scope of Spitzer's investigation into Van Eck isn't immediately clear -- an individual familiar with Spitzer's office indicated the investigation into any link between Van Eck and Canary wasn't as far along as investigations into other fund firms. However, several funds within the firm had suspiciously high levels of trading activity over the past two years.

International funds, such as the offerings from Van Eck, have attracted hedge funds and other entities eager to take advantage of inefficiencies in global investing and mutual fund prices -- specifically via "time-zone arbitrage." With time-zone arbitrage, investors aim to take advantage of "stale prices" in a fund's net asset value due to the fact that markets close at different time around the globe. For instance, if the U.S. markets have a big rally one day, the overseas markets are closed -- but they are certain to get a big pop because they often take their cue from U.S. markets. Time-zone arbitrageurs buy the international fund before the market opens, get the almost-guaranteed profit, and sell quickly -- typically within 24 hours.

While not technically illegal, time-zone arbitrage skims profits off the top of funds because of the heavy trading and increases the expenses a fund incurs. However, if a firm claims to deter such trading activity and then enters into relationships with a select few market timers, experts say that's a breach of fiduciary duty that may rise to the level of fraud.

In a prospectus for its funds, Van Eck said it "has a policy of discouraging short-term trading and may limit or reject purchase orders and exchanges at its discretion. Shareholders are limited to six exchanges per calendar year."

The prospectus said limits are being waived out of the firm's international gold fund and money market fund "as long as Van Eck believes shareholders will not be materially disadvantaged."

The charts below show an alarmingly high level of redemptions within at least four Van Eck funds over the past two years -- including a few funds within variable annuities. The median redemption rate as a percentage of net assets at funds is about 25% -- in other words, the average investor holds the fund for four years.

One Van Eck fund had redemption levels more than 100 times that amount. High redemption rates compared with net assets in the fund signal that an enormous amount of money is moving through the fund. When you cross-check the redemption levels against sales figures and find that they are nearly even -- and in both Van Eck variable annuity funds, they are, with redemptions as a percentage of sales within five basis points of 100% -- the combination raises a clear red flag on abusive trading.

"It's a laugher," said Max Rottersman, founder of, of the exorbitant trading levels within Van Eck funds. "That someone in accounting didn't jump up after seeing this data and yell 'something's wrong!' is astonishing."

While neither the firm nor a spokeswoman for Spitzer would respond to questions regarding any timing arrangement between Canary and Van Eck, the trading activity signals that something was amiss within Van Eck's funds.Meanwhile, another official familiar with the matter put it plainly: "Van Eck," the individual said, "was in bed with Canary."

If the allegations regarding improper trading prove true at Van Eck, it could be devastating for the shop, which is considerably smaller than the other firms linked to Canary --




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