U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19294 / July 7, 2005
SECURITIES AND EXCHANGE COMMISSION v. SCOTT A. CHRISTIAN, CV 05 6239 (LTS)(S.D.N.Y.)
The Securities and Exchange Commission ("Commission") today filed a civil injunctive action in the United States District Court for the Southern District of New York against Scott A. Christian ("Christian"), a registered representative (or broker) at Trautman Wasserman & Co., Inc. ("Trautman Wasserman"), who participated in a scheme to defraud mutual funds and their shareholders by engaging in late trading and disruptive market timing of mutual fund shares for customers. The Commission's complaint alleges that Christian executed tens of thousands of "late trades" for hedge fund customers and engaged in deceptive conduct to evade restrictions that mutual fund companies sought to place on his customers' frequent, short-term trading of mutual fund shares. Additionally, Christian created false records to conceal late trading.
The Commission filed its complaint against:
Christian, 29 years old, a resident of New York, New York. At all relevant times, Christian was employed by Trautman Wasserman as a registered representative.
The complaint alleges the following:
Between January 2001 and September 2003, Christian, together with others at Trautman Wasserman, engaged in late trading on behalf of customers. "Late trading" refers to the practice of placing orders to buy, redeem, or exchange mutual fund shares after 4:00 p.m. Eastern Time, the time as of which mutual funds typically calculate their net asset value ("NAV"), but receiving the priced based on the prior NAV already determined as of 4:00 p.m. Late trading enables the trader to profit by basing trades on market events that occur after 4:00 p.m. Christian carried out the late-trading scheme by having customers submit proposed mutual-fund trading orders during the trading day and time-stamping them just before 4:00 p.m. to make it appear that customer orders were received before 4:00 p.m. Christian did not, however, enter these proposed trades for execution. Instead, Christian communicated with customers after 4:00 p.m. and often until 6:30 p.m. or later to determine if the customers wanted to execute the proposed orders or submit different orders based on post-4:00 p.m. market information. After customers made their final post-4:00 p.m. trading decisions, Christian entered orders into the trading system used by Trautman Wasserman.
Additionally, Christian engaged in deceptive conduct to evade restrictions that mutual fund companies sought to place on Christian's potentially harmful market timing trades. "Market timing" includes frequent, short-term trading in mutual fund shares 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, disrupt the management of the mutual fund's investment portfolio, and cause other shareholders to bear the costs incurred by accommodating frequent trading by the market timer. During the period March 2001 through April 2003, Christian and Trautman Wasserman received 307 letters from 40 fund companies seeking to stop excessive trading by accounts at Trautman Wasserman. Knowing that mutual fund companies monitored market-timing activity by account number and registered representative identification number, Christian opened and traded in multiple accounts for his market-timing customers and utilized numerous different registered representative identification numbers, so that his customers could evade mutual fund companies' restrictions on their trading.
The Commission charges Christian with violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and with aiding and abetting violations of Section 10(b), 15(c) and 17(a) of the Exchange Act and Rules 10b-3, 10b-5 and 17a-3 thereunder. The Commission seeks a permanent injunction against future violations of these provisions, disgorgement plus prejudgment interest, and civil penalties.
The Commission acknowledges the assistance of the Office of the Attorney General of the State of New York. The Commission's investigation is continuing.