U.S. Securities and Exchange Commission
Litigation Release No. 18738 / June 4, 2004
Securities and Exchange Commission v. Geek Securities, Inc., Geek Advisors, Inc., Kautilya "Tony" Sharma, and Neal R. Wadhwa, Civil Action No. 04-80525 Paine/Johnson (S.D. FL)
SEC Charges a Boca Raton Broker-Dealer/Investment Adviser, its Principal and One of its Brokers with Fraud in Connection with Mutual Fund Market Timing and Late Trading
The Securities and Exchange Commission filed a civil securities fraud action today in the United States District Court for the Southern District of Florida, against Geek Securities Inc., Geek Advisors, Inc., Kautilya "Tony" Sharma, president and owner of Geek Securities and Geek Advisors and Neal R. Wadhwa, a Geek Securities registered representative. According to the SEC's complaint, the defendants engaged in pervasive market timing and late trading on behalf of their institutional clients. The defendants defrauded mutual funds and their shareholders by engaging in a series of activities designed to circumvent the restrictions on market timing by those mutual funds and systematically engaged in late trading in those mutual fund shares.
With respect to the defendants' market timing scheme, the SEC alleges that, between at least September 2001 and November 2003, mutual fund companies blocked Geek Securities and Geek Advisors clients from trading in their mutual funds due to their market timing activities. "Market timing" includes (a) frequent buying and selling of shares of the same mutual fund or (b) buying or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while not illegal per se, can harm other mutual fund shareholders because it can dilute the value of their shares, if the market timer is exploiting pricing inefficiencies, or disrupt the management of the mutual funds' investment portfolio and can cause the targeted mutual fund to incur costs borne by other shareholders to accommodate frequent buying and selling of shares by the market timer. In response to the blocks by the mutual fund companies, according to the Commission's complaint, Geek Securities and Geek Advisors, through Sharma and Wadhwa, used various deceptive activities to evade detection of ongoing market timing, including establishing new customer accounts for existing customers and transferring balances between customer accounts, thereby making it more difficult for mutual fund companies to detect market timing. By October 2003, Geek Securities and Geek Advisors clients had been banned from trading in all but about four mutual funds.
The SEC's complaint also alleges that, between at least September 2001 and November 2003, Geek Securities and Geek Advisors, through Sharma and Wadhwa, participated in a systematic scheme to late trade mutual fund shares on behalf of some of its clients. "Late trading" refers to the practice of placing orders to buy and sell mutual funds shares after the close of the market at 4:00 p.m. EST, but at the mutual fund's net asset value ("NAV"), or price, determined at the market close at 4:00 p.m. EST. Late trading enables the trader to profit from market events that occur after 4:00 p.m. EST, but that are not reflected in the previously calculated NAV. Late trading is illegal. According to the SEC's complaint, Geek Securities and Geek Advisors received trading instructions from customers after 4:00 p.m. EST and executed those trades as if the trading instructions had been received prior to that time. According to the SEC, Geek Securities and Geek Advisors attempted to conceal their late trading activities by time-stamping trades using a time-stamp machine that, intentionally, did not reflect the accurate time, time-stamping only purported preliminary trade instructions received before 4:00 p.m. EST but not final trade instructions received after 4:00 p.m. EST, and by accepting trade instructions received after the 4:00 p.m. EST cut-off by undocumented phone conversations.
The Commission's complaint alleges that Geek Securities, Geek Advisors, Sharma and Wadhwa violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The complaint also alleges that Geek Securities violated Section 15(c)(1) of the Exchange Act and that Sharma and Wadhwa aided and abetted Geek Securities' violation of Section 15(c)(1) of the Exchange Act. The Commission is seeking injunctive relief, disgorgement, and civil money penalties.