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U.S. Securities and Exchange Commission

U.S. Securities and Exchange Commission

Litigation Release No. 18524 / December 24, 2003

SEC v. Daniel Calugar and Security Brokerage, Inc. (U.S. District Court for the District of Nevada, Civil Action No. CV S-03-1600-RCJ (RJJ))

SEC Files Emergency Action Against Security Brokerage, Inc. and Daniel Calugar for Engaging in Mutual Fund Late Trading and Market Timing Schemes

Court Orders Immediate Freeze of Defendants' Assets and Orders Defendants Not to Destroy Documents

On December 22, 2003, the Securities and Exchange Commission filed civil fraud charges against Security Brokerage, Inc. of Las Vegas and its president and majority owner, Daniel Calugar, for their participation in a scheme to defraud mutual fund shareholders through improper late trading and market timing. From at least 2001 to 2003, Calugar, trading through Security Brokerage, reaped profits of approximately $175 million from improper late trading and market timing, principally through mutual funds managed by Alliance Capital Management and Massachusetts Financial Services (MFS). Calugar, age 49, is an attorney with residences in Las Vegas and Los Angeles.

Based on the Commission's application, United States District Judge Robert Clive Jones of the District of Nevada issued a temporary restraining order freezing the assets of the defendants, prohibiting the destruction of documents, and granting expedited discovery. The court scheduled a hearing for January 5, 2004, on the Commission's application for a preliminary injunction. The Commission applied for the emergency relief after learning that on December 18, 2003, Calugar had transferred $50 million of proceeds from his scheme out of MFS. This transfer occurred on the same day that the Commission instituted an enforcement action against Alliance in connection with market timing activity. The Commission's action against Alliance identified Calugar as the largest market timer at Alliance.

The Commission's complaint, filed in United States District Court in Las Vegas, alleges as follows:

  • Late Trading — "Late trading" refers to the practice of placing orders to buy or sell mutual fund shares after market close at 4:00 p.m. EST, but at the mutual fund's NAV, or price, determined at the market close. Late trading enables the trader to profit from market events that occur after 4:00 p.m. EST but that are not reflected in that day's price. Because Security Brokerage was a self-clearing broker-dealer, it was permitted to submit trades that it received from its clients before 4:00 p.m. EST to the National Securities Clearing Corporation (NSCC) after 4:00 p.m. EST. Security Brokerage created false internal records in which the order time for all trades was entered as 3:59 p.m. EST. Calugar, who was trading on his own behalf and therefore making trading decisions, routinely sent trades for his own account to the NSCC one to two hours after 4:00 p.m. EST, even though he had no legitimate reason for doing so.
  • Market Timing — "Market timing" refers to the practice of short term buying and selling of mutual fund shares in order to exploit inefficiencies in mutual fund pricing. From at least 2001 to September 2003, the defendants engaged in extensive market timing of Alliance and MFS funds despite knowing that the prospectuses for those funds either prohibited or discouraged timing and that timing was not available to most investors. With Alliance, Calugar agreed to make long-term investments (referred to as "sticky assets") in Alliance hedge funds in exchange for Alliance permitting him to engage in market timing in its mutual funds. Calugar made a similar proposal to MFS which was not accepted, but he nevertheless continued to engage in market timing in MFS funds.

Security Brokerage and Calugar are charged with violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief granted by the court, the Commission is seeking a judgment of permanent injunction, disgorgement of ill-gotten gains, and monetary penalties.

See the Complaint in this matter.



Modified: 12/29/2003