Wall Street's rogue mutual fund traders now have more to fear than the wrath of New York Attorney General Eliot Spitzer.

Last week, federal prosecutors in New York shocked securities experts by filing criminal charges against three brokerage executives who were involved in helping hedge funds market-time shares of mutual funds.

The charges against the former top executives of Mutuals.com, a Dallas brokerage, are the first to allege that mutual fund market-timing -- a theoretically legitimate arbitrage strategy -- can be a crime in certain circumstances. The case has defense lawyers fearing that prosecutors now may be gunning for other brokers who engaged in the practice.

In charging Richard Sapio, Eric McDonald and Michele Leftwich with securities fraud, prosecutors allege the "defendants engaged in a number of deceptive and fraudulent practices designed to conceal the identity" of the firm's hedge fund customers and their trading activity.

Prosecutors contend the Mutuals.com execs resorted to the deception after a number of mutual funds told them to stop market-timing because it was hurting long-term investors. Specifically, they allege the defendants conspired to evade detection by setting up multiple accounts and incorporating two affiliated brokerages to make their trades.

Sources familiar with the investigation said one of the clients that Mutuals.com did market-timing for was Veras Investment Partners.

Until now, state prosecutors in Spitzer's office and regulators at the Securities and Exchange Commission have spared brokers criminal prosecution. In the scandal's highest-profile broker case, regulators filed civil fraud charges against a group of Prudential Securities brokers alleged to have used deception to conceal their clients' abusive trading activity. The criminal charges against the Mutuals.com executives mirror those, but come with criminal penalties.

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