More Charges in Mutual Fund Trading Inquiry
A former managing director at Canadian Imperial Bank of Commerce was charged with helping to finance improper mutual fund trading, as regulators broaden their probe of the $7.4-trillion fund industry to target banks.
Paul Flynn, 46, was arrested near his suburban New York home, New York Atty. Gen. Eliot Spitzer said in a statement. If he is convicted, Flynn would face up to 25 years in prison for the five felony charges, which include larceny and fraud. He was accused of stealing $1 million. The Securities and Exchange Commission also sued Flynn.
Spitzer’s charges make Flynn the seventh person to be accused of criminal actions in the probe of fund trading. Regulators are extending their investigation to banks that lent money to hedge funds for frequent trades or after-market transactions. These trades increase costs for other holders.
“This is the first case against someone who arranged financing so that late traders and timers could conduct illegal activities,” Spitzer said. “This prosecution sends the message that those who arrange funding for illegal trading will be held accountable, as are those who make the trades.”
The SEC claims that Flynn helped clients, including Canary Capital Partners and Samaritan Asset Management, to carry out improper trades from 2001 to 2003. In his position, Flynn arranged structured swaps and loan agreements from a CIBC affiliate that allowed the funds to make bigger bets, the SEC said.
Flynn, who appeared in a New York court Tuesday, declined to comment. Bail was posted at $750,000.
David Gendelman, a lawyer for Flynn, declined to comment. Robert Waite, a spokesman for Toronto-based Canadian Imperial, chose to say only that Flynn had left the bank in December.
“Flynn knew or was reckless in not knowing that the hedge funds were engaging in late trading and deceptive market timing,” the SEC said.
Regulators say companies in the fund industry allowed or engaged in market timing, or frequent trading that diluted returns for long-term mutual fund investors.
Spitzer and the SEC are investigating Canada’s third-biggest bank for allegedly providing more than $1 billion in financing to hedge fund investors who made improper trades.
Flynn was aware that these hedge fund clients were engaged in unlawful mutual fund trading through an electronic trading platform operated by Security Trust Co., a trade-processing firm based in Phoenix, the SEC said.
The funds traded included the MFS Emerging Growth Fund and the Artisan International Fund. Representatives of both funds informed Spitzer’s office that no one trading in their funds had permission to engage in late trading.
Seacaucus, N.J.-based Canary has settled a civil suit, agreeing to return $30 million in profit and pay a $10-million fine. Security Trust helped Canary make mutual fund trades, and the firm will be dissolved.
