Security Trust to Be Dissolved by U.S.Regulators (Update6)
2003-11-25 18:54 (New York)
(Adds that defendants were released onbail in ninth
Nov. 25 (Bloomberg) -- Security Trust Co.became the first
company ordered to shut down in theindustrywide probe of illegal
mutual fund trading. Three former topexecutives of the Phoenix-
based retirement-plan administratorwere charged with fraud.
The criminal complaint against GrantSeeger, William Kenyon
and Nicole McDermott by New YorkAttorney General Eliot Spitzer
alleges they committed larceny andfalsified business records by
allowing hedge funds to buy and sellmutual fund shares at prices
not available to most investors. TheOffice of the Comptroller of
the Currency said in a statement thatit plans to close the 12-
year-old firm, which processes fundorders for 2,300 clients.
The allegations mark the first time thatregulators have
addressed the illegal conduct ofso-called intermediaries in the
$7 trillion mutual fund industry.``Pervasive misconduct must be
met with appropriate sanctions,''Spitzer said in a statement.
Executives at some of the industry'sbiggest mutual fund
companies including Alliance CapitalManagement Holding LP and
Putnam Investments have been ousted inthe trading scandal.
Spitzer has filed criminal chargesagainst a former Bank of
America Corp. broker, a former traderat Millennium Partners LP
and the former vice chairman of FredAlger Asset Management Inc.
Seeger, the 41-year-old founder and formerchief executive
of Security Trust, along with Kenyon,57, and McDermott, 34, may
serve as much as 25 years in prison ifconvicted on the most
serious counts of grand larceny,regulators said. The defendants'
actions led to larceny of more than $1million, Spitzer said.
Frederick Hafetz, Seeger's lawyer, saidhis client's conduct
wasn't criminal. ``He did nothingillegal,'' he said in an
interview. ``We're confident he'll bevindicated in court.''
McDermott's lawyer, Don Martin, said hisclient was first to
complain about the activities beingchallenged by regulators to
her boss and to Security Trust's board.``It's extremely
regrettable and disappointing that theyhave chosen to charge
her,'' Martin said from his office inPhoenix.
Gerald Shargel, a lawyer for Kenyon, saidhis client would
plead not guilty and contest thecharges.
The three former executives appeared inNew York state
criminal court for their arraignmentson Tuesday afternoon.
Seeger and Kenyon were released aftereach posting a $1 million
bond. McDermott posted a $500,000 bond.
Security Trust, which employs more than100 people, said it
would work with regulators to dissolvethe company by March 31.
The business of the company's clientswill be transferred to an
unidentified entity, Chief ExecutiveOfficer Thomas Plumb said in
A civil complaint from the Securities andExchange
Commission alleged that Security Trustfacilitated hundreds of
after-hours trades in almost 400 mutualfunds from May 2000 until
July to the detriment of long-term investors.Seeger and
McDermott, the former senior vicepresident of corporate
services, ``repeatedly misrepresentedto mutual funds that the
hedge funds were a retirement planaccount,'' the SEC said.
Among the mutual funds that hedge fundCanary Capital
Partners LLC illegally traded forprofits of at least $1 million
each were the Legg Mason Value Trust,the MFS Emerging Growth
Fund and the Artisan InternationalFund, according to Spitzer's
complaint. The Legg Mason fund, managedby Bill Miller, has
outperformed the Standard & Poor's500 Index for a record 12
Security Trust, which had an agreementunder which Canary
paid it 4 percent of its profits abovea certain threshold,
received about $5.8 million from thefraudulent trading, the SEC
said in a statement. Canary made over$85 million, the SEC said.
Spitzer alleged on Sept. 3 that SecurityTrust helped
Canary, which is based in New Jersey,make illegal mutual fund
trades after stock markets closed at 4p.m. New York time. Mutual
funds are priced once a day, and alltrades are due by 4 p.m. to
get that day's closing price. Orders submitted later are supposed
to get the following day's price to prevent any investors from
taking advantage of late-breaking news.
To give intermediaries such as Security Trust time to pool
orders, fund companies often let them submit trades after the
close of U.S. markets. Spitzer alleged in his September complaint
against Canary that Security Trust allowed the hedge fund to slip
in trades until 9 p.m.
Regulators probably will have more cases against
intermediaries as the review of trading abuses continues because
a lack of regulation may have led to violations at other firms,
said Philip Newman, who advises mutual fund companies and fund
boards as head of the investment management practice at the law
firm Goodwin Procter LLP in Boston.
``The real problem that's being exposed here is that all
these different intermediaries need to be subject to a single set
of rules and regulations for oversight of the industry to be
effective,'' Newman said.
On Nov. 21, Spitzer said some companies would disappear as a
result of his probe. ``There will be entities that will no longer
exist when we are done,'' he said.
Last week Spitzer and the SEC filed a civil complaint
against Gary Pilgrim and Harold Baxter for allowing short-term
trading of their company's funds. Allegations also have been
leveled against former employees of Putnam Investments and
Prudential Securities Inc., as well as Bank of America and Alger
Today's filings by Spitzer, the OCC and the SEC marks the
broadest cooperation between state regulators and their federal
counterparts in the mutual fund investigation. Spitzer criticized
the SEC two weeks ago for settling civil fraud charges against
Boston-based Putnam without consulting him.
Stephen Cutler, director of the SEC's enforcement division,
said the case against Security Trust was the result of
``effective cooperation by federal and state agencies alike.''
Seeger's company was cited three times in the 1990s by
Arizona bank regulators for violating its fiduciary duties to
clients and investing customers' money in risky ventures that the
firm had a stake in. Seeger was personally cited in a 1998 cease-
and-desist order from the banking department for misleading
Seeger, who grew up in Grand Forks, North Dakota, graduated
from Arizona State University in 1984. With a classmate, he
started a financial consulting business in 1987. Four years
later, they formed Security Trust.
On Oct. 30, Security Trust said it fired 30 people,
including a half dozen who worked with Canary. Kenyon, Security
Trust's former president, was among those ousted.
--Aaron Pressman in the Boston newsroom (617) 338-5822 or
apressman@Bloomberg.net and Philip Boroff in the New York
newsroom (1) (212) 318-2602, or email@example.com with
reporting by Otis Bilodeau in Washington. Editors: Quinson,