The Securities and Exchange Commission announced that, on March 31, 2004, the United States District Court for the District of Arizona entered a final judgment in a mutual fund market timing and late trading case against defendant Security Trust Company, N.A. (STC), an uninsured national banking association based in Phoenix, Arizona. Among other services, STC effected mutual fund trades for participants in retirement plans and processed data regarding those trades for the plans' third party administrators (TPAs). In accordance with the final judgment, STC paid $1 million in disgorgement on March 31, 2004, when STC was shut down pursuant to orders from its primary regulator, the Office of the Comptroller of the Currency. STC consented to the entry of the judgment without admitting or denying the allegations in the Commission's complaint.

In addition to STC, the Commission's complaint, filed on November 25, 2003, charged STC's former chief executive, Grant D. Seeger, 40, of Phoenix; its former president, William A. Kenyon, 57, of Phoenix; and its former senior vice president, Nicole McDermott, 34, who resides near Phoenix. McDermott consented to the entry of a final judgment that was entered on February 23, 2004. The case is pending against Seeger and Kenyon.

The Commission's complaint alleged the following:

  • Late Trading: From May 2000 to July 2003, STC facilitated hundreds of mutual fund trades in nearly 400 different mutual funds by several hedge funds controlled by Edward J. Stern, known as the Canary Capital funds. Approximately 99% of these trades were transmitted to STC after the 4:00 p.m. EST market close; 82% of the trades were sent to STC between 6:00 p.m. and 9:00 p.m. EST. The hedge funds' late trading was effected by STC through its electronic trading platform, which was designed primarily for processing trades by TPAs for retirement plans. STC repeatedly misrepresented to mutual funds that the hedge funds were a retirement plan account, even though the defendants knew that the hedge funds were not a TPA or a retirement plan account.

  • Market Timing: During its three-year relationship with the Canary hedge funds, STC and the other defendants employed various methods to attempt to conceal the hedge funds' market timing activities from mutual funds, including a "piggybacking" strategy in which STC set up a sub-account within the account of one of STC's TPA clients and attached the Canary hedge funds' mutual fund trades to the trades of this client without its knowledge.

The complaint charged STC, Seeger, Kenyon, and McDermott with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. STC is also charged with violating Rule 22c-1, under Section 22(c) of the Investment Company Act of 1940, which prohibits the purchase or sale of mutual fund shares except at a price based on the current NAV of such shares that is next calculated after receipt of a buy or sell order. Seeger is also charged with violating Section 37 of the Investment Company Act, which prohibits stealing the assets of a registered investment company. The Commission is seeking an accounting, disgorgement, and penalties from Seeger, Kenyon and McDermott and a judgment of permanent injunction against Seeger and Kenyon.

For additional information, see Litigation Release No. 18479 (Nov. 25, 2003).