Trading abuses `widespread'

"We believe, as a result of a net that we've cast, that the market timing, late trading issues are quite widespread. It is more widespread than we originally anticipated," Securities and Exchange Commission chairman William Donaldson told the House financial services subcommittee on capital markets.

The Toronto Star
October 31, 2003

Trading abuses ‘widespread’
Problem worse than thought, SEC says. Spitzer considers charging another firm.

WASHINGTON—The top U.S. markets regulator told Congress yesterday that abusive trading in mutual fund shares is more prevalent than expected.

"We believe, as a result of a net that we've cast, that the market timing, late trading issues are quite widespread. It is more widespread than we originally anticipated," Securities and Exchange Commission chairman William Donaldson told the House financial services subcommittee on capital markets.

His testimony came as New York Attorney-General Eliot Spitzer considered bringing charges soon against mutual fund group Strong Capital Management and its founder Richard Strong.

On Tuesday, Massachusetts regulators charged Putnam Investments with civil fraud for failing to prevent trading abuses. Two Putnam managers, Omid Kamshad and Justin Scott, also were charged with fraud.

The SEC joined the mutual fund investigation in September after Spitzer announced a $40 million (U.S.) settlement with hedge fund Canary Capital Partners LLC over mutual fund trading abuses. The SEC asked 88 mutual funds to provide information on their trading practices. So far about half have indicated they found market-timing arrangements with one or more customers, giving them trading advantages over long-term investors.

Donaldson said the SEC is trying to improve co-ordination between the SEC office responsible for overseeing the mutual fund industry and the office that conducts inspections. "We're working toward better synergy with the Division of Investment Management and inspections," he said.

Sources say the SEC plans to subpoena at least five New York Stock Exchange market-making firms concerning alleged trading violations.

The firms include LaBranche & Co., Goldman Sachs Group Inc.'s Spear, Leeds & Kellogg, Van der Moolen Holding NV, Bear Stearns Cos.' Bear Wagner Specialists, and FleetBoston Financial Corp.'s Fleet Specialists. The SEC also may subpoena the two smallest specialist firms, Performance Specialist Group LLC and Susquehanna Specialists Inc., the sources said.

Specialists have exclusive franchises to trade in listed companies' shares on the exchange floor.

Two weeks ago, LaBranche chairman Michael LaBranche said the NYSE had told him that his firm could be penalized $43.5 million. Van der Moolen has said its NYSE specialist may be fined at least $35 million.

Exchange officials claimed traders sometimes failed to execute orders received electronically within 10 seconds of their receipt, LaBranche said at the time. That led to trades made out of sequence and resulted in some investors missing out on the best price.

The impending subpoenas "show that the SEC has decided to step in and take charge of this investigation," said John Olson, a senior securities partner at Gibson, Dunn & Crutcher in Washington and a former legal adviser to the NYSE board.

Embattled Putnam was in the news again yesterday, revealing it received a subpoena from the justice department requesting documents related to trading in the shares of its mutual funds.

Putnam is the first mutual fund to disclose it has received such a subpoena.

Trustees for the Massachusetts state pension fund voted yesterday to fire Putnam, which currently manages $1.7 billion in domestic and international equities for the $29 billion fund.

from the star's wire services


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