Gregory O. Trautman, Exchange Act Rel. 61167, December 15, 2009
Time since appeal – 1 year 9 months 20 days
Time since last brief – 1 year 6 months 24 days
Trautman was the CEO of a broker dealer. The ALJ found he schemed to defraud mutual funds through illegal late trading and fraudulent market timing of mutual fund shares on behalf of both customers and the firm. The Commission entered the following sanctions: a bar from associating with a broker-dealer; a cease and desist order; $608,000 of disgorgement, plus additional prejudgment interest; and a $120,000 penalty. Trautman's firm made $22.6 million in revenues from the scheme and mutual fund customers lost an estimated $102 million.
Late trading is the illegal and fraudulent practice of permitting mutual fund share orders received after 4 p.m. Eastern time when the market closes to receive that day's price instead of the next day's price. Frequent trading involves attempts to exploit pricing inefficiencies resulting from the fact that mutual fund prices are only calculated once at the end of the trading day. Although frequent trading is not per se illegal it violates the rules of most mutual funds that permit only a limited number of trades by investors. The practice harms long term shareholders and increases fund expenses. The opinion provides a detailed explanation of why both practices are harmful to investors and cites many of the Commission's significant cases in the area.
Trautman's firm actually established a mutual fund timing department. Many of the institutional clients of this department have been subject to civil or administrative cases. The firm developed a number of procedures designed to hide its trading activities from mutual funds. The Commission found that Trautman was personally involved in these activities and acted with scienter. It also found that Trautman aided and abetted the firm's violations.
The Commission took into account conduct that occurred before the limitations period in evaluating motive, intent and knowledge. As an evidentiary matter, it noted that it will not consider previous regulatory sanctions based solely on CRD printouts – instead it requires that the actual settlement records be introduced into evidence. The Commission also rejected Trautman's argument that no penalty or disgorgement should be imposed due to his financial condition. It noted that such a showing is only one factor that it will consider in determining monetary sanctions.
Lexisnexis
Showing posts with label Mutual fund late trading. Show all posts
Showing posts with label Mutual fund late trading. Show all posts
Mutual Fund Late Trading Schemer Barred
Joseph John VanCook, Exchange Act Rel. 61039, November 20, 2009
Time since appeal filed: 1 year 3 months 30 days
Time since last brief: 11 months 17 days
VanCook appeals the ALJ's decision that he violated the anti-fraud provisions of Exchange Act Section 10(b) by orchestrating a scheme to allow his clients to late trade mutual fund shares. The ALJ also found that VanCook aided and abetted violations of various books and records provisions by his firm. The Commission upheld the finding of violations. It barred him from broker-dealer association, entered a cease and desist order, ordered disgorgement of $533,000 plus prejudgment interest, and imposed a $100,000 penalty.
As the Commission explained, mutual fund orders are submitted throughout the trading day and mutual funds generally calculate their net asset value (NAV) after the markets close at a time disclosed in their prospectus. Orders submitted by the 4 p.m. (Eastern time) market close are executed at the NAV for that day. The funds involved here indicated that orders had to be actually received by the intermediary (VanCook's firm) by 4 p.m. to be eligible for execution at the NAV for that day.
Late trading is the practice of permitting orders received after 4 p.m. to receive the NAV calculated as of the 4 p.m close instead of the NAV calculated after the close the next day. This fraudulent practice allows a trader to profit from market events that occur after 4 p.m. and are not reflected in the NAV for the current day. It harms innocent fund shareholders by diluting the value of their investments.
The Commission rejected VanCook's claim he was unable to pay disgorgement or a penalty. The Commission does not automatically waive these payments. Here, it found that VanCook had a substantial net worth. It also found his conduct so egregious that it would not be appropriate to waive monetary sanctions.
The Commission offered no explanation for why this one had been sitting in the inventory for so long. The issues were neither novel nor complex.
Time since appeal filed: 1 year 3 months 30 days
Time since last brief: 11 months 17 days
VanCook appeals the ALJ's decision that he violated the anti-fraud provisions of Exchange Act Section 10(b) by orchestrating a scheme to allow his clients to late trade mutual fund shares. The ALJ also found that VanCook aided and abetted violations of various books and records provisions by his firm. The Commission upheld the finding of violations. It barred him from broker-dealer association, entered a cease and desist order, ordered disgorgement of $533,000 plus prejudgment interest, and imposed a $100,000 penalty.
As the Commission explained, mutual fund orders are submitted throughout the trading day and mutual funds generally calculate their net asset value (NAV) after the markets close at a time disclosed in their prospectus. Orders submitted by the 4 p.m. (Eastern time) market close are executed at the NAV for that day. The funds involved here indicated that orders had to be actually received by the intermediary (VanCook's firm) by 4 p.m. to be eligible for execution at the NAV for that day.
Late trading is the practice of permitting orders received after 4 p.m. to receive the NAV calculated as of the 4 p.m close instead of the NAV calculated after the close the next day. This fraudulent practice allows a trader to profit from market events that occur after 4 p.m. and are not reflected in the NAV for the current day. It harms innocent fund shareholders by diluting the value of their investments.
The Commission rejected VanCook's claim he was unable to pay disgorgement or a penalty. The Commission does not automatically waive these payments. Here, it found that VanCook had a substantial net worth. It also found his conduct so egregious that it would not be appropriate to waive monetary sanctions.
The Commission offered no explanation for why this one had been sitting in the inventory for so long. The issues were neither novel nor complex.
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