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Last Updated: Wednesday, 3 September, 2003, 21:44 GMT 22:44 UK
US mutual funds under attack
New York attorney general Eliot Spitzer has said his office has found evidence of illegal trading by mutual funds which leaves their shareholders out of pocket.

Mr Spitzer said he had reached a $40m settlement with a hedge fund over allegations of illegal trading, and the firm would also assist with an ongoing inquiry into the trades.

Research had suggested that mutual fund shareholders may have lost billions of dollars a year from the trades, Mr Spitzer said.

"My office will take all reasonable steps to ensure that the ill-gotten gains of those who engage in this conduct are returned to investors," he said.


Mr Spitzer said investigations found that ordinary investors were losing out from illegal trading in mutual funds' shares.

Certain companies and individuals have been given the opportunity to manipulate the system
Elliot Spitzer, New York attorney general

One of the trading patterns being investigated, known as "late trading," involves buying shares after the market closes.

Another practice, called "timing," involves taking advantage of small differences between closing prices and early stock movements the next day.

The $40m settlement was agreed with Canary Capital Partners LLC - a multi-million dollar hedge fund - two Canary related entities, and Edward J Stern, the managing principal of those entities, the attorney general's statement said.

Of the $40m, $30m is being paid in restitution and a $10m penalty is being paid.


Mr Spitzer's statement said Canary obtained special trading opportunities with leading mutual funds - including Bank of America's Nation Funds, Banc One, Janus and Strong.

Canary did not admit or deny wrongdoing and a statement from the firm said it had agreed to the settlement "to avoid protracted and complex litigation."

Mr Stern had also agreed not to trade in mutual funds or manage any public investment funds for 10 years.

Bank One spokeswoman Julie Crothers said: "We will look into the issues raised by the allegations against the hedge fund and we will cooperate fully with the attorney general's office."

A spokeswoman for Strong said: " We are fully co-operating with the New York attorney general's office."

Bank of America and Janus also said they were cooperating with Mr Spitzer's office.

'Double standards'

"The full extent of this complicated fraud is not yet known," Mr Spitzer said.

"But one thing is clear: The mutual fund industry operates on a double standard.

"Certain companies and individuals have been given the opportunity to manipulate the system.

"They make illegal after-hours trades and improperly exploit market swings in ways that harm ordinary long-term investors."

Mr Spitzer was at the forefront of investigations into conflicts of interest by analysts at major Wall Street firms during the dot.com boom.

Earlier this year ten investment banks reached a $1.4bn deal with regulators over the charges.

Wall Street settles analyst scandal
28 Apr 03  |  Business

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