New York's Spitzer Agrees Settlement With Hedge Fund

by Glen Shapiro, LawAndTax-News.com, New York

05 September 2003

New York Attorney General Eliot 'Untouchables' Spitzer has announced a settlement of US$40m in a case involving alleged improper share trading carried out by a hedge fund acting in consort with four major mutual fund companies.

According to Spitzer, Edward J. Stern, managing principal of Canary Investment Management LLC, agreed without admitting or denying wrongdoing that his company will pay a $10 million fine and $30 million in restitution. The settlement deals with civil charges that Mr. Stern violated New York state's business law, but Spitzer says that charges are '"almost certain" to be levelled against the four mutual-fund companies cited in but not joined to the civil action. They are Bank of America, Bank One, Janus Capital, and Strong Capital Management Inc.

The alleged abuses involved the improper trading of fund shares, sometimes after the market's close, making tens of millions of dollars in profits at the expense of individual investors. The case could re-ignite concerns that the major Wall Street investment houses give preference to large investors.

According to the complaint against Canary, Mr. Stern, the 38 year-old son of Leonard Stern, a very wealthy New York real-estate investor, committed two trading offenses, one being frequent and undisclosed in-and-out "timing trades" at the mutual funds, and the other, more serious, by agreeing to engage in late trading, after the 4 pm close of stock-market trading, at funds managed by Bank of America, and via smaller firms including Security Trust Co. in Phoenix, Ariz.

A Stern family spokesman said Canary had decided to enter into a settlement to avoid protracted and complex litigation, and admitted no wrongdoing. Mr. Stern also voluntarily agreed not to trade in mutual funds or manage any public investment funds for 10 years.

SEC Chairman William H. Donaldson called the alleged abuses "reprehensible"; but privately his officials complained that Spitzer had not informed or involved the SEC during his investigation.

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