Security Trust, Ex-CEO May Face Charges in Mutual Fund Trade Case

Security Trust Co. and its former chief executive, Grant Seeger, will be formally accused today of helping a hedge fund make illegal mutual fund trades, people familiar with the matter said Monday.

The criminal and civil charges come two months after New York Atty. Gen. Eliot Spitzer said Security Trust allowed Canary Capital Partners to illegally submit mutual fund trades after the market’s 4 p.m. EST close. Spitzer, the Securities and Exchange Commission and the Office of the Comptroller of the Currency will announce separate actions, the people said.

Security Trust, a 12-year-old firm based in Phoenix, consolidates buy and sell orders from retirement plans and passes them on to mutual fund companies. Security Trust spokeswoman Nancy Murphy said she didn’t know whether the company would be charged today. Seeger resigned Oct. 5.

“We have been cooperating with all the regulators,” Murphy said. “We have cleaned house. None of the people who worked with Canary are with us now. We feel like we have stabilized the company.”

Spitzer set the probe of the $7-trillion mutual fund industry in motion with a Sept. 3 complaint against Canary that implicated Security Trust. He said Friday that some companies would disappear as a result of his investigation because of criminal indictments. “There will be entities that will no longer exist when we are done,” he said.

Spitzer spokeswoman Juanita Scarlett declined to comment, as did SEC spokesman John Nester. A spokesman for the comptroller of the currency couldn’t be reached.

Canary’s use of Security Trust, which helps retirement plans and other funds with $13 billion in assets process trades in more than 200 mutual fund families, called into question the fund industry’s reliance on outsiders to enforce rules.

Mutual funds are priced once a day, and all trades are due by 4 p.m. to get that day’s closing price. Orders submitted later are supposed to get the next day’s price. 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. to take advantage of late-breaking news. The trading siphoned profits from long-term fund shareholders, he said.

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 in which the firm had a stake. Seeger was cited in a 1998 cease-and-desist order from the banking department for misleading regulators.

Security Trust also placed client funds with promoters who’d been charged with securities fraud and racketeering by the state attorney general, according to the banking department. Clients had lost money because of Security Trust’s “self-dealing, conflicts of interest and breaches of its fiduciary duties,” state bank examiners concluded.

On Oct. 30, Security Trust fired 30 people, including half a dozen who worked with Canary, Murphy said. Security Trust President William Kenyon was among those dismissed.