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

paragraph.)

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.

Larceny

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 statement.

SECComplaint

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

straight years.

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.

Late Trading

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.

`Real Problem'

``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

Asset Management.

Cooperation

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

regulators.

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 pboroff@bloomberg.net with

reporting by Otis Bilodeau in Washington. Editors: Quinson,

Kellermann

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