Former Fred Alger Executive Enters Guilty Plea in Mutual Fund Probe

A former vice chairman at Fred Alger Management Inc. pleaded guilty Thursday to criminal charges of evidence tampering as part of a probe into whether the money management firm permitted illegal trading of its mutual fund shares.

James Connelly Jr., a 17-year veteran at the firm who was responsible for overseeing its business strategy, also agreed to pay $400,000 to settle separate civil charges with the Securities and Exchange Commission.

Connelly surrendered to New York Atty. Gen. Eliot Spitzer’s office after a probe of Fred Alger Management’s trading activities produced evidence that Connelly encouraged employees to destroy e-mails and other documents.

Connelly was the third person to be charged since Spitzer’s office began probing mutual fund trading. The investigation, first made public when Spitzer announced a $40-million settlement with hedge fund Canary Capital Partners on Sept. 2, has expanded to dozens of financial institutions.

As part of his plea agreement, Connelly admitted to deceiving Fred Alger’s lawyers by concealing that Texas hedge fund Veras Investment Partners had traded mutual fund shares after the market closed.

In the civil case, the SEC said Connelly violated anti-fraud laws by allowing hedge funds to rapidly trade its mutual funds to profit from inefficiencies in how the shares are priced. Connelly did not admit or deny the charges, the SEC said.

Connelly permitted only clients who pumped money into its other funds to engage in so-called market timing. The practice hurt Fred Alger’s long-term investors by diluting the value of their shares and jacking up their transaction costs, the SEC said.

Connelly began permitting select clients to engage in market timing in the mid-1990s, the SEC said. The activity peaked this year, when more than a dozen market timers had close to $200 million in Alger’s funds.

The charges against Connelly stem from a broader investigation into Fred Alger Management. Other Alger employees, as well as the firm itself, may face criminal or civil charges, people familiar with the investigation said.

Fred Alger Management said that it did not believe any of the trades had affected fund performance, but that it planned to hire an independent auditor to assess whether shareholders had been hurt.