Vice Fund Parent Faces Charges on Trading
It wasn’t Mutuals.com Inc.’s most sinister-sounding product -- the Vice Fund of “socially irresponsible” stocks such as cigarette makers and casino operators -- that caught the attention of federal regulators.
Rather, they accused the firm and three of its executives Thursday of making thousands of illegal trades. The Dallas-based broker-dealer and investment advisor, founded in 1994, became the sixth company to face charges of improper trading in the widening fund industry scandal.
In civil fraud charges, the Securities and Exchange Commission accused Mutuals.com of late trading and market timing -- the chief abuses in the scandal that has tarred the $7.1-trillion mutual fund business -- and of using “a whole host of methods” to disguise the activities.
“It sounds like they never met a vice they didn’t like,” said Roy Weitz, editor of the Tarzana-based Web site FundAlarm.com.
The charges don’t involve the Vice Fund or the firm’s other funds, but another side of its business: helping its 18 nonretail clients, mainly institutions and hedge funds, manage portfolios of funds offered by other firms.
The SEC complaint named Chief Executive Richard Sapio, President Eric McDonald and compliance officer Michele Leftwich as defendants.
Lawyer Stephen Topetzes of Kirkpatrick & Lockhart in Washington, who is representing the defendants, said they have cooperated with the SEC. However, “Our clients intend to contest vigorously the claims and allegations,” Topetzes said, adding that the charges “lack merit.”
The SEC, which is seeking undisclosed fines and restitution from the firm, said a court-appointed monitor would review Mutuals.com’s operations.
Market timing refers to rapid buying and selling of fund shares to exploit price inefficiencies. Though it is not necessarily illegal, many funds bar it because it can hurt long-term investors by driving up trading costs.
From July 2001 to September 2003, the SEC alleges, Mutuals.com engaged in improper trading of 294 funds. The firm devised tactics to hide the activity, including making the trades through two brokerages set up just for that purpose, and suggesting that clients use Social Security numbers other than their own to disguise their trades, regulators say.
Late trading, or placing orders to buy or sell fund shares after the market’s close but at that day’s price (rather than at the next day’s price as required by law), occurred at Mutuals.com at least during the first 10 months of this year, the SEC alleges.
The firm and its affiliates allegedly tried to hide the activity by omitting portions of the trading data they gave clearing agents.
In the last three years, regulators said, Mutuals.com earned more than $4.5 million in “wrap” fees from its clients, the “vast majority” attributable to market timing and late trading.
Mutuals.com is probably best known for the Vice Fund, a reverse take on so-called socially responsible funds that shun investments in companies considered unfriendly to, say, gun control or public health. The Vice Fund’s logo includes a gun sight, a pair of dice and a cigarette; it invests in defense companies, casino operators, cigarette makers and brewers.
The fund was launched in August 2002 and had $5.9 million in assets as of Sept. 30.
Positioned as a long-term growth fund, the portfolio has notched a total return of 28.9% this year, versus 23.4% for the benchmark Standard & Poor’s 500 index.
