SEC Charges JB Oxford With Fraud
Federal regulators on Wednesday charged a Beverly Hills-based brokerage and three of its executives with securities fraud, alleging that the company arranged for clients to engage in market timing or late trading of more than 600 mutual funds.
The Securities and Exchange Commission’s civil suit against JB Oxford Holdings Inc. is the latest case in a year-old campaign to stamp out fraudulent fund trading.
The suit also is the latest run-in that Oxford has had with authorities. Under previous management, the firm processed trades for three notorious “boiler-room” brokerages in the 1990s.
In its complaint, the SEC says Oxford’s processing unit, National Clearing Corp., earned almost $1 million from June 2002 to September 2003 for arranging fraudulent market-timing and late-trading fund transactions for institutional clients.
Market timing refers to lightning-fast trades to exploit short-term market moves. Late trading is the acceptance of orders after markets close.
When some mutual fund companies tried to stop Oxford’s trades from getting through because they violated the funds’ rules, Oxford executives opened new accounts to try to disguise the trades, in a procedure the executives referred to as cloning, the suit says.
“We continually look for ways to increase the [trade] executions and decrease the restrictions” imposed by fund companies, an Oxford executive told a client in a June 2003 e-mail, according to the suit.
The SEC alleges that Oxford and three current or former executives -- James G. Lewis, Kraig L. Kibble and James Y. Lin -- committed securities fraud. The suit, filed in U.S. District Court in Los Angeles, seeks unspecified financial penalties.
Attorneys for Oxford, Kibble and Lin didn’t return phone calls. Lewis’ attorney, Matthew Dontzin, said his client would “vigorously defend” himself. Lewis quit the firm in April.
Christopher Jarratt, Oxford’s chief executive, didn’t return a call for comment. He led an investor group that bought Oxford in 1998. He wasn’t named in the SEC suit.
The case echoes more than a dozen others that have been filed since New York Atty. Gen. Eliot Spitzer stunned the fund industry Sept. 3 with allegations of widespread trading abuses.
Oxford was named in Spitzer’s complaint but not charged. Spitzer said Oxford processed trades for Canary Capital Management, a hedge fund that was the first investor named in the fund scandal.
In most of the cases since Spitzer’s announcement, regulators targeted fund companies that allegedly permitted improper trading in return for other fee-generating investments from the favored clients.
The Oxford case represents a separate effort by authorities to go after financial intermediaries that allegedly facilitated improper trading. Many institutional investors and fund companies rely on clearing operations like Oxford’s to be the conduit for fund transactions.
“As today’s action demonstrates, we will hold accountable all those market participants -- including their management -- who engage in or facilitate conduct that harms the investing public,” said Stephen M. Cutler, the SEC’s director of enforcement in Washington.
In suing Oxford, the SEC is targeting a company that now is a shell: In the wake of regulators’ probes of the company, management sold Oxford’s discount brokerage unit in June, and this week the company agreed to sell its clearing operation.
In the suit, the SEC says certain clients agreed in writing to pay Oxford a fee as much as 1% of the assets involved in return for the market-timing and late-trading transactions it handled.
Market timing isn’t illegal, but many fund companies have tried to stop such trading because it can be disruptive to funds and hurt buy-and-hold investors by raising portfolio costs.
Late trading is illegal, as it involves investors entering trades after the market has closed -- something akin to placing bets on horses after the race is over. In a typical scenario, a late trader would try to capitalize on news that breaks after the close to gain an advantage over investors who would have to wait for the next day’s trading to begin.
In May 2002, Lewis, then Oxford’s president, began negotiating to open two accounts worth $5 million each with an unidentified Swiss money manager, the SEC suit claims. It says that in a meeting with Lewis, the money manager’s London-based investment advisor “expressed an interest in late trading.”
After the meeting, Lewis directed Kibble, the head of operations at Oxford’s clearing unit, to look into how late Oxford could submit fund trades to a centralized transaction processor, according to the suit. The cutoff, Kibble learned, was 6:50 p.m. Eastern time.
Fund companies have long been willing to accept trades after the 4 p.m. market close, to allow for processing time. But brokerages are supposed to guarantee that any trades submitted after 4 p.m. were received from their investors during normal market hours.
Oxford agreed to submit client trades it received after 4 p.m., the SEC said.
Once it sealed a trading deal with the Swiss firm, Oxford used that as a template for other such agreements, the agency said. It didn’t name any of the investors.
From June 2002 to September 2003, Oxford “facilitated more than 12,000 late trades on behalf of its institutional customers,” the suit alleges. The trades were in funds sold by more than 70 companies.
Lewis “routinely” approved overtime for employees so that they could handle late trades, the suit claims.
Market-timing trades also became a big business for Oxford, the SEC said. The firm handled more than 25,000 such trades between June 2002 and September 2003, the suit said.
In an e-mail to Lewis in October 2002, Kibble said market-timing trades were increasingly difficult to pull off. Oxford staff “are on the telephone with fund companies every morning trying to talk our way out of further restrictions and other threats from fund companies,” he wrote.
Oxford’s predecessor firm, RKS Financial Group, had ties in the early 1990s to Southern California stock promoter Rafi Khan, who in 2001 settled stock manipulation charges by agreeing to a five-year ban from the securities industries. In the mid-1990s, Oxford was a major processor of stock trades for three of the biggest boiler-room brokerages of the era, which later were closed by regulators.
The company wasn’t charged in any of those cases.
Oxford shares fell 1 cent to $1.69 on Nasdaq.
