TRENTON
– Attorney General Peter C. Harvey
today announced that Canary Capital Partners
LLC, Edward J. Stern, the hedge fund’s
managing principal, and two related firms
will pay New Jersey $10 million to resolve
allegations that they market timed mutual
funds and engaged in illegal late trading
to the detriment of long-term shareholders
of the mutual funds.
Stern
and the Secaucus-based firms – Canary
Capital Partners LLC, Canary Capital Investment
LLC and Canary Capital Partners Ltd. (collectively,
“Canary”) – allegedly
used a variety of schemes and devices
to conceal their trading. They also allegedly
offered various financial incentives to
mutual fund companies and brokerage firms
for the opportunity to late trade and/or
market time funds, and for non-public
information about mutual fund portfolio
holdings.
Stern
and Canary have agreed to cooperate fully
in any further investigations being conducted
by the Attorney General’s Office,
including the New Jersey Bureau of Securities.
They also have agreed to ensure the cooperation
of any entities in which they have an
ownership interest or managerial role
and of all officers, directors, agents
and employees of Canary and such entities.
Stern and Canary have agreed as part of
the settlement to be barred for 13 years
from acting as broker-dealers or investment
advisers.
“Market
timing and late trading conduct hurts
individual investors by reducing the value
of their mutual fund shares,” said
Attorney General Harvey. “We will
protect the money of small investors from
rapid trading and after hours transactions
since these arrangements violate the rules
of the funds and the securities laws.”
The
Bureau of Securities found that Canary
and Stern engaged in late trading by buying
and selling mutual funds after the 4 p.m.
close of the market in violation of federal
securities law and regulations. Late trading
involves a privileged investor making
trades after hours when mutual fund shares
are frozen at the closing price, in order
to take advantage of late-breaking events
that impact the share price when the market
reopens.
In
addition, the Bureau of Securities found
that Canary and Stern engaged in market
timing of mutual funds and mutual fund
sub-accounts of variable annuity products
by making frequent trades into and out
of the funds to take advantage of market
fluctuations. Most funds have policies
against market timing, which works to
the detriment of long-term investors by
(1) allowing the market timer to siphon
off short-term profits and dilute the
value of the fund, (2) increasing the
transactional costs of the fund, and (3)
making the fund more difficult to manage.
“The
New Jersey Bureau of Securities plays
an important role by registering securities
and those in the investment industry,
and by enforcing our securities laws,”
said Bureau Chief Franklin L. Widmann.
“We investigate individual cases
of fraud as well as wider patterns of
abuse within the industry, such as we
had in this case. We urge any investor
who suspects fraud or improper practices
to notify the Bureau.”
Investors
can telepzone the Bureau of Securities
at 973-504-3600, or call
toll-free from within New Jersey at 1-866-838-6240.
They also can reach the Bureau through
its Web site www.NJConsumerAffairs.com/bos.htm.
Chief of Enforcement Richard Barry and
Investigating Attorney Julian Leone conducted
the investigation for the Attorney General’s
Office.
In
some cases, mutual fund companies and
brokerage firms permitted Canary and Stern
to market time funds in exchange for “sticky
assets,” longer-term investments
that generated commissions and fees.
>>
Stern
Consent Order (12mb pdf) plugin
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