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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
September 16, 2003

ADMINISTRATIVE PROCEEDING
File No. 3-11261


In the Matter of

THEODORE CHARLES SIHPOL III,

Respondent.


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ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, SECTION 203(f) OF THE INVESTMENT ADVISERS ACT OF 1940, AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940, AND NOTICE OF HEARING

I.

The Securities and Exchange Commission deems it appropriate and in the public interest to institute 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 ("Sihpol" or "Respondent").

Accordingly, IT IS ORDERED that administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act, Sections 15(b) and 21C of the Exchange Act, Section 203(f) of the Advisers Act, and Sections 9(b) and 9(f) of the Investment Company Act be, and hereby are, instituted.

II.

The Division of Enforcement alleges the following:

Overview

1. This is a proceeding against Sihpol, formerly a registered representative with Banc of America Securities LLC ("BAS"), for his key role in enabling certain hedge fund customers of BAS to engage in "late trading" in shares of mutual funds offered by Bank of America and others. Late trading refers to the practice of placing orders to buy or sell mutual fund shares after the close of trading as of 4:00 p.m. Eastern Time ("ET"), but receiving the price based on the prior net asset value ("NAV") 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. By virtue of his conduct, Respondent violated and/or aided and abetted and caused violations of the antifraud, mutual fund pricing and broker-dealer record-keeping provisions of the federal securities laws.

Respondent

2. Sihpol, age 36, resides in New Canaan, Connecticut. Sihpol holds Series 7, 63, and 66 licenses. During the conduct at issue, Sihpol was a registered representative in BAS' high-net worth group located in New York.

Related Entities

3. BAS, a registered broker-dealer, is a full-service U.S. investment bank and brokerage firm with principal offices in San Francisco, New York, and Charlotte, North Carolina. BAS is also registered as an investment adviser pursuant to the Advisers Act. BAS is a subsidiary of Bank of America Corporation ("BAC"), a bank and financial holding company incorporated in Delaware and with its principal place of business in Charlotte. Other BAC subsidiaries, Banc of America Advisors, LLC and Banc of America Capital Management, LLC, both located in Charlotte, managed and advised a family of funds called the Nations Funds. Nations Fund, Inc., incorporated in Maryland, is the registrant and issuer of the shares of the Nations Funds.

4. Canary Capital Partners, LLC, is a domestic hedge fund, and Canary Capital Partners, Ltd., is an offshore hedge fund domiciled in Bermuda, managed by an investment adviser Canary Investment Management, LLC, and its principal, Edward J. Stern (collectively, "Canary"). Canary has offices in Secaucus, New Jersey.

Background - Late Trading

5. Rule 22c-1(a) under the Investment Company Act requires registered mutual funds, and their principal underwriters and dealers, to sell and redeem fund shares at a price based on the current NAV next computed after receipt of an order to buy or redeem. Mutual funds generally determine the daily price of mutual fund shares as of 4:00 p.m. ET. In these circumstances, orders received before 4:00 p.m. must be executed at the price determined as of 4:00 p.m. that day. Orders received after 4:00 p.m. must be executed at the price determined as of 4:00 p.m. the next trading day.

6. Mutual fund prospectuses typically contain representations concerning the time as of which the NAV is set for purposes of determining the price at which shareholders may buy or redeem mutual fund shares. For example, the August 1, 2001 prospectus for Nations Funds Primary A Shares indicates that orders received "before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share."

7. "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. ET, but receiving the price based on the prior NAV already determined as of 4:00 p.m. Late trading enables the trader to profit from market events that occur after 4:00 p.m. but that are not reflected in that day's price. In particular, the late trader obtains an advantage -- at the expense of the other shareholders of the mutual fund -- when he learns of market moving information and is able to purchase (or sell) mutual fund shares at prices set before the market moving information was released.

8. Permitting late trading violates Rule 22c-1(a) under the Investment Company Act and defrauds innocent investors in those mutual funds by giving to the late trader an advantage not available to other investors.

Sihpol Enabled Canary to Engage in Late Trading

9. From 2001 until 2003, Sihpol enabled Canary to engage in late trading in shares of Nations Funds and other mutual funds. Specifically, Sihpol enabled Canary to place orders to buy or sell mutual fund shares through BAS until 6:30 p.m., but receive the price previously determined as of 4:00 p.m. that day (rather than the price determined as of 4:00 p.m. the next day). 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.

10. As a result, Sihpol willfully violated and/or aided and abetted and caused violations of (i) Section 17(a) of the Securities Act, (ii) Section 10(b) of the Exchange Act, and Rule 10b-5, (iii) Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4, and (iv) Rule 22c-1 promulgated under Section 22(c) of the Investment Company Act.

Origins of the Relationship Between Canary and BAS

11. In or around April 2001, Stern met with Sihpol concerning Canary potentially trading mutual funds through BAS. Stern outlined Canary's approach to timing mutual funds. "Timing" refers to the practice of short term buying and selling of mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Stern asked if Canary would be allowed to time the Nations Funds family. Sihpol agreed to check and get back to Canary.

12. Sihpol and other BAS representatives met with Stern and Canary traders again in or around April 2001 to discuss Stern's proposal. The parties discussed Canary's mutual fund trading strategy, timing certain Nations Funds and BAS financing Canary's trading.

13. In that meeting, Sihpol and other BAS representatives offered to install an electronic trading system in Canary's offices that would enable Canary to bypass BAS brokers and enter trades directly to BAS' clearing function. They also explained that, by using the electronic system, Canary would be able to enter its trades until 6:30 p.m. ET. They also stated that, through the electronic system, Canary would be able to trade numerous other mutual fund families that BAS distributed.

14. Canary confirmed an agreement in a May 1, 2001 letter from Stern to Sihpol. First, Stern identified the Nations Funds he wanted to time and the dollar amounts of timing for each fund. Next, Stern confirmed that initially Canary would execute late trades by calling or faxing the trades to Sihpol or his team, and later Canary would use the electronic system:

We plan on transacting our trades manually at first (via Fax), at a time of day that is a little bit earlier than [one of the clearing representatives] specified in our first meeting. As soon as we can work out our lending arrangement with the bank and begin transacting electronically via ADP [i.e., the BAS electronic system], we will draw down leverage against the capital we have deployed in the Nations funds, effectively increasing our trading capital with your firm to $32 million. If all goes well, this capital should grow larger as we get a sense of what trades can and cannot be done via the Banc of America Securities Platform. We really would like to get going with ADP and begin trading electronically as soon as possible.

"Manual" Late Trading at BAS

15. In or around May 2001, Canary began to late trade the Nations Funds. At first, Canary conducted its late trading "manually." In the manual stage, Canary was able to engage in late trading primarily because Sihpol and his team falsified BAS' books and records. Prior to 4:00 p.m. ET, a Canary trader would send Sihpol or a member of his team a series of "proposed" mutual fund trades by e-mail or facsimile. Upon receipt, Sihpol, or a member of his team acting upon his instructions, would fill out an order ticket, time stamp it, and set it to one side until that evening. Thus, Sihpol created false order tickets that made it appear as if the orders had been received prior to 4:00 p.m. ET.

16. Sometime after 4:00 p.m. ET, a Canary trader would telephone Sihpol or a member of his team, and would either confirm or cancel the "proposed" trades. If confirmed, Sihpol's team would fax the order (with its pre-4:00 p.m. time stamp and no post-4:00 p.m. time stamp) to the clearing department for processing. As a result, Canary would receive that day's NAV. If Canary cancelled the "order," Sihpol or a member of his team would discard the ticket.

Late Trading Through BAS' Electronic System

17. In the summer of 2001, BAS technicians installed the 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.

18. After a Canary trader entered the trades directly into the system, the trader would print out a document confirming the trades and the time (after 4 p.m.) that the trades had been entered. The trader then faxed the document to Sihpol or a member of his team. The following day, Sihpol or a member of his team would use this document to reconcile Canary's trades. Once the trades were reconciled, Sihpol or a member of his team discarded the document.

19. From the summer of 2001 until the summer of 2003, Canary used the electronic system to late trade. Canary also late traded "manually" whenever there were technical problems with the electronic system. BAS technicians also installed a second direct access system in the residence of a Canary trader.

20. The electronic system enabled Canary to late trade the Nations Funds and in the many other mutual fund families with which BAS had clearing agreements. By using the electronic system, Canary was able to send orders directly to BAS' clearing function, circumventing the normal trading process in which each brokerage order must be properly documented, including the time the order was received.

21. Canary paid BAS a so-called "wrap fee," of one percent of the Canary assets in Nations Funds and one-half of one percent of the assets in other funds traded through the electronic link. Sihpol received a portion of this wrap fee. In addition, Canary agreed to leave millions of dollars invested in BAC proprietary mutual funds on a long-term basis. Canary also paid interest and other charges to BAS and its affiliates. Canary also paid fees for the installation and maintenance of the electronic system.

Violations

22. As alleged in paragraphs A. through U. above, Sihpol willfully violated and/or caused violations of Section 17(a) of the Securities Act in that he, by the use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly, in the offer or sale of securities, employed devices, schemes or artifices to defraud; obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon purchasers or prospective purchasers of such securities, as described above.

23. As alleged in paragraphs A. through U. above, Sihpol willfully violated and/or aided and abetted and caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that he, in connection with the purchase or sale of securities, directly or indirectly, by the use of the means or instrumentalities of interstate commerce, or of the mails, employed devices, schemes or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchasers of the securities, as described above.

24. As alleged in paragraphs A. through U. above, Sihpol willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder, which require registered brokers and dealers to make and keep current, and preserve, books and records relating to their brokerage business, and to make certain reports and filings with the Commission.

25. As alleged in paragraphs A. through U. above, Sihpol willfully aided and abetted and caused violations of Rule 22c-1 promulgated under Section 22(c) of the Investment Company Act, which requires registered mutual funds, their principal underwriters and dealers to sell and redeem fund shares at a price based on the current NAV next computed after receipt of an order to buy or redeem.

III.

In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest that public administrative and cease-and-desist proceedings be instituted to determine:

A. Whether the allegations set forth in Section II are true and, in connection therewith, to afford Respondent an opportunity to establish any defenses to such allegations;

B. What, if any, remedial action is appropriate in the public interest against Respondent pursuant to Section 15(b) of the Exchange Act, and whether a civil penalty should be ordered pursuant to Section 21B of the Exchange Act;

C. What, if any, remedial action is appropriate in the public interest against Respondent pursuant to Section 203(f) of the Advisers Act, and whether a civil penalty should be ordered pursuant to Section 203(i) of the Advisers Act;

D. What, if any, remedial action is appropriate in the public interest against Respondent pursuant to Section 9(b) of the Investment Company Act, and whether a civil penalty should be ordered pursuant to Section 9(d) of the Investment Company Act; and

E. Whether, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 9(f) of the Investment Company Act Respondent should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act, Sections 10(b) and 17(a) of the Exchange Act and Rules 10b-5, 17a-3, and 17a-4 thereunder, and Rule 22c-1(a) under the Investment Company Act, and whether Respondent should be ordered to pay disgorgement pursuant to Section 8A(e) of the Securities Act and Section 21C(e) of the Exchange Act, 203(j) of the Investment Advisers Act, and Section 9(e) of the Investment Company Act.

IV.

IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 200 of the Commission's Rules of Practice, 17 C.F.R. § 201.200.

IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220.

If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly notified, the Respondent may be deemed in default and the proceedings may be determined against him upon consideration of this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), and 310 of the Commission's Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f) and 201.310.

This Order shall be served forthwith upon Respondent personally or by certified mail.

IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice.

In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceeding will be permitted to participate or advise in the decision of this matter, except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not "rule making" within the meaning of Section 4(c) of the Administrative Procedure Act, it is not deemed subject to the provisions of that Section delaying the effective date of any final Commission action.

By the Commission.

Jonathan G. Katz
Secretary

 

http://www.sec.gov/litigation/admin/33-8288order.htm


Modified: 09/17/2003