A U.S. judge ordered a British hedge fund firm and its chief executive to pay $76.8 million (48.9 million pounds) following a trial on U.S. Securities and Exchange Commission civil charges that it engaged in abusive mutual fund trading.
The SEC case against Pentagon Capital Management Plc and Lewis Chester is among the last related to a long-running industry-wide probe into improper trading in mutual fund shares, and one of the few to go to trial. That probe was unveiled in September 2003 by then-New York Attorney General Eliot Spitzer.
U.S. District Judge Robert Sweet in Manhattan said the SEC proved that Pentagon intentionally and egregiously violated federal securities laws by engaging in late trading, or making mutual fund trades after the market close, but at stale prices.
This scheme was broad ranging over the course of several years and in no sense isolated, Sweet wrote.
The judge separately rejected the SEC's claim that Pentagon engaged in fraudulent market timing in mutual funds.
Pentagon had been accused of trading improperly from about June 1999 to September 2003. The penalty includes the disgorgement of $38.4 million of improper profits and a $38.4 million fine.
Sweet had presided over a 17-day non-jury trial that ended last May.
We are grateful for Judge Sweet's finding that no illegal market timing took place. We are disappointed by his late trading conclusion, Frank Razzano, a lawyer for the defendants, said in a phone interview. We shall be appealing.
Market timing involves rapid trading in violation of funds' rules, and at the expense of ordinary investors who lack such privileges. It is considered improper.
Late trading involves the trading of mutual fund shares after 4 p.m. eastern time, when share prices are calculated, but at old prices. It is considered to be illegal.
Pentagon once oversaw more than $2 billion of assets, but began closing its funds shortly before the SEC in April 2008 filed its lawsuit. It is winding down operations.
The case is SEC v. Pentagon Capital Management Plc et al, U.S. District Court, Southern District of New York, No. 08-03324.
(Reporting By Jonathan Stempel; Editing by Maureen Bavdek)