Michael Sassano turned his knack for mutual fund market-timing into a $10 million-a-year business for himself, people who know him say, and now federal regulators are broadening their scrutiny of the Oppenheimer & Co. ( OPY) stockbroker. In his best years, Sassano's annual trading commissions routinely exceeded $10 million and sometimes approached $15 million, according to people familiar with the 33-year-old broker. The money helped pay for a lavish lifestyle that included a villa in St. Tropez, where Sassano frequently vacations. To put Sassano's riches in perspective, the notorious group of former Prudential Securities brokers facing civil fraud charges raked in about $3 million in commissions from all of their market-timing activities put together, according to regulators. "A broker doing $10 million in commissions is phenomenal," said Jonathan Kord Lagemann, a securities attorney and a former general counsel for a brokerage firm. While it's not known what percentage of Sassano's commissions came from market-timing, at least one person estimated that just over half came from placing such trades for his long list of hedge fund customers. Market-timing is the term for a legal but strongly discouraged trading strategy in which mutual fund shares are bought and sold frequently in order to capitalize on price discrepancies in different markets. The 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. Most fund companies disclose in their prospectuses that they try to ferret out and stop market-timers. But investigators have found that far too many fund companies were willing to bend or ignore those rules when it came to a privileged group of hedge funds and their brokers. In a few instances, such as the former Prudential group in Boston, brokers have been charged with fraud in the burgeoning investigation into the $7 trillion mutual fund industry. (Prudential Securities is jointly owned by Wachovia ( WB) and Prudential Financial ( PRU)).
To date, Sassano has not been charged with any wrongdoing in the mutual fund investigation. At Oppenheimer, he continues to work, unlike dozens of other former brokers who were caught up in the scandal at A.G. Edwards ( AGE), Bear Stearns ( BSC), KeyCorp's ( KEY) McDonald Investments and Merrill Lynch ( MER). (Oppenheimer & Co. is unrelated to OppenheimerFunds.) But securities regulators are taking a close look at the broker because of his reputation on Wall Street as someone with a big list of market-timing customers and his ties to other brokers implicated in the scandal. New York Attorney General Eliot Spitzer's office
has subpoenaed records from Oppenheimer to learn more about how Sassano carved out his lucrative niche putting fast money together with mutual funds that could be market-timed. Investigators at the NASD also recently questioned a former A.G. Edwards broker in Boston about market-timing trades he allegedly made for Atlantique Capital Advisors, a defunct $200 million hedge fund that Sassano invested in and helped organize. Additionally, TheStreet.com has learned that the Securities and Exchange Commission has asked a number of mutual fund companies to scour their internal emails for any references to Sassano and his hedge fund clientele as part of its investigation. Sassano could not be reached for comment. His attorney, Ira Lee Sorkin, a noted white-collar criminal defense lawyer, declined to comment. Spitzer's office and the SEC declined to comment. Sources familiar with Sassano, including one of his customers, said the broker had arrangements with several mutual fund companies, including Sun Life Financial's ( SLF) MFS Funds and Kinetics Mutual. Sources said he conducted market-timing strategies in JW Seligman funds but without an arrangement with the fund manager. Officials with all three fund companies declined to comment. But all three funds have acknowledged permitting some customers to engage in market-timing in the past.
MFS, for instance, has said it expects to be charged by regulators for permitting hedge funds to market-time its funds and is trying to negotiate a settlement. In November, a source said lawyers from the SEC interviewed several Kinetics Mutual officials about the firm's decision to permit some big-money customers and their brokers, including Sassano, to engage in market-timing. Sassano's defenders said the broker did nothing wrong and had permission from the fund companies to market-time. Additionally, they said his supervisors at CIBC Oppenheimer and later Oppenheimer were well aware of his market-timing trades. Regulators, meanwhile, believe Sassano's market-timing business was so lucrative that he occasionally referred some of his hedge fund customers to other market-timing brokers. Massachusetts regulators contend that Sassano, while working at CIBC Oppenheimer, referred two of his hedge fund customers -- Chronos Asset Management and Head Start Advisors -- to former Prudential broker Martin Druffner, who was a college friend of Sassano's. Druffner is one of seven former Prudential brokers charged by regulators with using deception to hide their identities and make hundreds of market-timing trades on behalf of their hedge fund customers. More recently, Spitzer and the SEC have begun looking into some of the financing arrangements for the hedge funds Sassano worked with when he was a broker at CIBC Oppenheimer. Regulators are looking into whether CIBC, a division of Canadian Imperial Bank of Commerce ( BCM), structured derivatives trades that enabled the hedge funds to leverage themselves and make bigger market-timing bets than they normally would have been able to under traditional borrowing guidelines. A source familiar with the investigation said regulators have identified former CIBC investment banker Paul Flynn as a "person of interest" in their investigation. Flynn, who left CIBC's New York office in December, worked with Sassano in finding financing for some of his hedge fund customers, a person familiar with Sassano said. Flynn's assistant also left the firm last month. Flynn could not be reached for comment. A CIBC spokesman declined to comment. Earlier this year, CIBC sold its Oppenheimer brokerage business to Fahnestock, which is now operating under the Oppenheimer name.
Chronos Asset Management, the Boston-area hedge fund that Sassano referred to his friend Druffner, received financing from CIBC, according to Massachusetts regulators. In addition, Atlantique Capital, the Garden City, N.Y., hedge fund that Sassano invested in and helped start up, received financing from CIBC. A person familiar with Sassano said Flynn's group at CIBC specialized in using credit derivatives to arrange financing for hedge funds. Credit derivatives are specialized financial instruments that are used to mitigate specific forms of credit risk by hedge fund or other speculators. Janet Tavakoli, a structured finance consultant, said hedge funds increasingly have been relying on credit derivatives to boost their leverage, a practice that enables them to increase the return on their investment without putting in additional capital or money. An official in Spitzer's office has described the issue of banks financing hedge funds that engaged in market-timing as the next big phase of its investigation.