SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
RELEASE NO. 8288 / September 16, 2003
SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 48493 / September 16, 2003
INVESTMENT ADVISERS ACT OF 1940
RELEASE NO. 2172 / September 16, 2003
INVESTMENT COMPANY ACT OF 1940
RELEASE NO. 26179 / September 16, 2003
ADMINISTRATIVE PROCEEDING File No. 3-11261
PROCEEDINGS INSTITUTED AGAINST THEODORE CHARLES SIHPOL III, A FORMER BROKER AT BANC OF AMERICA SECURITIES LLC, FOR ENABLING CERTAIN HEDGE FUND CUSTOMERS TO "LATE TRADE" MUTUAL FUNDS
The Commission today announced that it has instituted administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Section 203(f) of the Investment Advisers Act of 1940 ("Advisers Act"), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against:
Theodore Charles Sihpol III, age 36, a former registered representatives at Banc of America Securities LLC ("BAS"). BAS is a subsidiary of Bank of America Corporation ("BAC"). BAS is registered as a broker-dealer under the Exchange Act and as an investment adviser pursuant to the Advisers Act. Sihpol, a resident of New Canaan, Connecticut, was a broker in BAS' high-net worth group located in New York.
The Division of Enforcement alleges in the Order Instituting Proceedings that Sihpol played a key role in enabling certain hedge fund customers to engage in "late trading" of mutual fund shares. Late trading refers to the practice of placing orders to buy or sell mutual fund shares after the close of trading at 4:00 p.m. Eastern Time ("ET"), but receiving the price based on the prior net asset value already determined as of 4:00 p.m. Permitting late trading violates the federal securities laws concerning the price at which mutual fund shares must be bought or sold and defrauds innocent investors in those mutual funds by giving to the late trader an advantage not available to other investors.
The Division of Enforcement alleges that Sihpol engaged in the following unlawful conduct:
From 2001 until 2003, Sihpol enabled Canary Capital Partners, LLC, Canary Capital Partners, Ltd., Canary Investment Management, LLC, and Edward J. Stern (collectively, "Canary") to engage in late trading of mutual fund shares. In the process, Sihpol falsified, altered, destroyed, or evaded the creation of, books and records that BAS was required accurately to create, maintain and preserve.
Beginning in or around May 2001, Canary began "manually" to late trade BAC mutual funds, the Nations Funds. Sihpol or a member of his team would prepare and time stamp order tickets for "proposed" trades prior to 4:00 p.m. ET. Canary would decide whether to carry out the trades after 4:00 p.m. At that time, Sihpol or a member of his team would either use the order tickets to effect Canary's trades or would discard the tickets if Canary decided not to execute the trades. Sihpol thus created false order tickets that made it appear as if the orders had been received prior to 4:00 p.m. ET.
In the summer of 2001, BAS technicians installed an electronic direct access system in Canary's offices. Through this system, Canary was able to enter its trades directly into BAS' clearing function until 6:30 p.m. ET, and was able to late trade the Nations Funds and many other mutual funds with which BAS had clearing agreements. Canary used the electronic system to late trade mutual funds until the summer of 2003. Canary also continued to late trade "manually" whenever there were technical problems with the electronic system.
Canary paid BAS various fees and other charges for the mutual fund trading, and Sihpol received a portion of these fees and charges.
The Division of Enforcement alleges that Sihpol violated and/or aided and abetted and caused violations of (i) Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5, (ii) Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4, and (iii) Rule 22c-1 promulgated under Section 22(c) of the Investment Company Act of 1940.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Sihpol an opportunity to dispute the allegations, and to determine what sanctions, if any, are appropriate and in the public interest.
The Administrative Law Judge shall issue an initial decision no later than 300 days from the date of the service of the Order.
The Commission instituted this proceeding in conjunction with the New York Attorney General, who brought criminal charges in New York State Court against Sihpol.
Order Instituting Proceedings