Another Guilty Plea in Trading Scandal
A former Security Trust Co. executive pleaded guilty to a felony Tuesday in the widening mutual fund scandal, after admitting to having disguised illegal trades for hedge fund clients, New York Atty. Gen. Eliot Spitzer’s office said.
Nicole McDermott, former senior vice president of the Phoenix-based pension services outfit, faces a maximum of four years in prison, Spitzer’s office said.
McDermott is the third person to have entered a guilty plea since a sweeping investigation of trading abuses in the $7-trillion fund industry was made public in early September.
“We’re definitely going to see more guilty pleas,” said Howard Schiffman, a securities lawyer at Dickstein, Shapiro, Morin & Oshinsky. “We’re just beginning to see the magnitude of all this.”
Last month, Security Trust was accused of helping hedge fund clients make illegal trades in mutual fund shares.
The firm was ordered by banking regulators to shut down by March.
It was not clear how McDermott’s plea might affect former Security Trust Chief Executive Grant Seeger or the company’s former president, William Kenyon, who also were accused of wrongdoing.
The three were arrested Nov. 25 on charges of securities fraud and grand larceny.
Security Trust has administered roughly $13 billion in retirement and pension assets for about 2,300 retirement plans, which made the firm a middleman handling fund trades.
“In the course of pleading guilty, McDermott admitted to directing Security Trust employees to place numerous orders for mutual fund shares on behalf of two hedge fund clients after the 4:00 p.m. cutoff, but at the pre-4:00 p.m. price,” Spitzer’s office said in a statement.
“She further admitted to employing a variety of methods to disguise the source of the hedge funds’ trades,” the statement added.
So-called late trading is illegal because it allows the purchase of funds at stale prices, virtually guaranteeing profits.
Regulators allege that hedge funds that placed improper orders through Security Trust made $85 million in profits in recent years, while Security Trust made $5.8 million.
In all, more than 20 financial institutions have been implicated in the fund trading scandal, which also has involved allegations of misconduct involving “market timing,” or rapid-fire fund share trading. Some fund firms have been accused of allowing market timing for favored clients at the expense of other investors.
A spokeswoman for Security Trust declined to give any contact information about McDermott, who left the company Oct. 30.
In other news Tuesday related to the fund scandal:
* Walt Disney Co. said it was dropping Putnam Investments from the media giant’s employee-retirement savings plan.
Disney said it would replace the Putnam New Opportunities Fund with Calamos Growth Fund on Dec. 31, according to a letter addressed to participants in the Disney 401(k) plans.
Disney is at least the fifth big company to fire Boston-based Putnam since the fund firm was accused of fraud Oct. 28 by federal and state regulators. Putnam has since settled the charges with federal regulators.
* An investor filed suits in Manhattan federal court accusing Mellon Financial Group’s Dreyfus Corp. and Los Angeles-based Bjurman, Barry & Associates of charging investors unwarranted marketing fees in funds that don’t accept new customers.
Milton Pfeiffer sued on behalf of existing investors in more than 15 Dreyfus funds now closed to new investors and one closed Bjurman fund, the Bjurman Barry Micro-Cap fund. He alleges that the funds can’t justify the marketing fees -- so-called 12b-1 fees -- because they aren’t seeking more assets.
A spokeswoman for Dreyfus said the company hadn’t received the complaint and couldn’t comment on the allegations. A spokeswoman for Bjurman Barry had no comment.
Bloomberg News was used in compiling this report.
