Mutual Fund Timing Fraud Revealed At Millennium Partners
Attorney General Spitzer today announced an agreement with a prominent hedge fund that engaged in elaborate market timing schemes which skimmed tens of millions of dollars in profits from mutual fund investors.
Under the terms of the agreement negotiated jointly with the Securities and Exchange Commission, New York City-based Millennium Partners will disgorge $121.4 million in ill-gotten revenues. In addition, Millenniums founder, Israel A. Englander, will pay $30 million in civil penalties, and two management companies owned by Englander will disgorge $26.6 million. Two other top executives at Millennium and a securities trader will also pay penalties and receive regulatory sanctions. All of the monies will go to restitution for mutual fund shareholders.
"Millennium developed multiple schemes that cost mutual fund investors tens of millions of dollars," Spitzer said. "As a result of our investigation, those frauds have been halted, and restitution will be made to investors who were harmed."
According to the complaint issued today in connection with the agreement, Millennium earned more than $100 million from market timing transactions from 1999 to 2003. A substantial amount of this profit came from what traders dubbed "flying under the radar" transactions designed to get around defenses set up by mutual funds to deter market timing by disguising or concealing Millenniums identity.
The complaint alleges that one way Millennium "flew under the radar" was by creating more than 100 shell companies, which were then used to open 1,000 accounts at 39 different clearing firms. Millennium used the bogus accounts to make more than 76,000 timing transactions that might otherwise have been detected by monitors at mutual funds.
In addition, Millennium is alleged to have provided phony addresses on account applications to deceive mutual funds that tracked unwanted market timing activity by their clients street addresses. In some cases, Millennium even used rented post office boxes as part of the scheme to throw monitors off the hedge funds trail.
Millennium also used variable annuities and variable life insurance policies to "fly under the radar." The complaint alleges that numerous Millennium employees falsely posed as bona fide "annuitants" or "key persons" with supposed long-term investment objectives. This enabled Millennium to access numerous sub-accounts that concealed Millenniums true identity from mutual funds and others seeking to stop market timing activities. Through the false pretenses associated with these insurance transactions alone, Millennium was able to camouflage as much as $19 billion in market timing activity.
For their roles in these schemes, Millenniums Chief Operating Officer and General Counsel will pay $2 million and $25, 000 in penalties, respectively, and will be banned from mutual fund trading for three years. A securities trader at Millennium will pay $150,000 in penalties and has been suspended for one year from association with any investment adviser as result of his involvement in this scheme and other improper conduct.
Under the agreement, Millennium will continue its cooperation with regulators and adopt reforms to protect against future abuses, including:
- Create new chief legal officer and chief compliance officer positions;
- Retain an independent consultant to conduct a review of Millenniums legal, compliance and ethics procedures;
- Establish an oversight committee to manage legal, compliance and ethics issues; and,
- Retain an independent consultant to conduct a future review of Millenniums operations to ensure compliance with federal and state securities laws.
Spitzer thanked the Northeast Regional Office of the SEC for its participation in the investigation.
Millennium is the 15th firm and first hedge fund to reach an agreement regarding improper mutual fund trading practices since Attorney General Spitzer announced a landmark case against Canary Capital Partners in September 2003. To date, the investigations have returned approximately $3.5 billion to investors. In addition, nine mutual fund executives have pleaded guilty to fraud and related charges.
The investigation was conducted by Assistant Attorney General Charles Caliendo of the Investment Protection Bureau and Economist Hampton Finer of the Attorney Generals Public Advocacy Division.