Mutual Fund Scandal
In September 2003, New York Attorney General Eliot Spitzer announced the issuance of a complaint against New Jersey hedge fund company Canary Capital Partners LLC, charging that they had engaged in "late trading" in collusion with Bank of America's Nations Funds. Bank of America was charged with permitting Canary to purchase mutual fund shares, after the markets had closed, at the closing price for that day.
Spitzer's investigation was initiated after his office received a ten-minute June 2003 phone call from a Wall Street worker alerting them to an instance of the mutual fund scandal and late trading problem.
Late trading is illegal under New York 's Martin Act and Securities and Exchange Commission (SEC) regulations due to the unfair advantage the late trader gains over other traders. In the United States , mutual fund prices are set once daily at 4:00 p.m. Eastern time.
Late trading occurs when traders are allowed to purchase fund shares after 4:00 p.m. at that day's closing price. Under law, most mutual fund trades received after 4:00 p.m. must be executed at the following day's closing price.
Canary Capital settled the complaint for US$40 million
Spitzer also charged that major mutual fund groups Janus, Bank One, and Strong had facilitated market timing trading for favored clients.
Market timing is an investment strategy that tries to profit from short-term market cycles by trading into and out of market sectors as they heat-up and cool-off.
Allowing some clients to market time, while denying that ability to others, is considered unethical. It tends to increase the cost of administering a mutual fund, a cost borne by the rank-and-file fund investors who cannot market time.
The firms in question had claimed in their prospectuses that they prohibited market timing.
The practice tends to advantage the company's bottom-line and that of its share-holders at the expense of its fund investors. One estimate saw buy-and-hold mutual fund investors losing US$5 billion per year because of market timing trading.
Spitzer's complaint alleged that Canary Capital Partners had engaged in market timing transactions with 30 mutual fund companies.
Improper market timing is sometimes confused with acceptable market timing--attempts by market participants to purchase securities at a time when they are undervalued by the market and/or sell securities at a time when they are overvalued by the market.
See Other Market Timing Scandass Here
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