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New York Attorney General Eliot Spitzer shows no signs of slowing down. Having taken Wall Street firms to task for their stock research practices, he’s now set his sights on the mutual fund industry. In September, Spitzer announced that hedge fund Canary Capital Partners had agreed to pay $40 million to settle charges that it had illegally profited in the after-hours trading of mutual fund shares. In announcing the settlement, Spitzer said his office had evidence of widespread illegal trading schemes that could cost mutual fund shareholders billions of dollars annually. Canary agreed to pay restitution of $30 million plus a $10 million penalty to settle charges that it had illegally profited by being allowed to trade after hours at the 4 p.m. closing price of the shares of five mutual fund companies. In a written statement Spitzer said: “The full extent of this complicated fraud is not yet known, but one thing is clear: The mutual fund industry operates on a double standard; certain companies and individuals have been given the opportunity to manipulate the system . . . in ways that harm ordinary long-term investors.” According to a complaint filed in state supreme court, New York’s trial-level court, the five mutual fund companies, whose shares Canary traded in after hours, were Bank of America’s Nations Funds, Banc One, Janus Capital Corp., Strong Capital Management, and Security Corporation Trust Co. Bank of America, Banc One, and Strong Capital Management all say, through spokespeople, that their companies are cooperating fully with the investigation. Brad Maione, a spokesman for Spitzer, says the settlement is “not the end of the story, but just the beginning.” He adds that Edward Stern, a principal and manager of Canary, is cooperating with the investigation. Stern signed the settlement agreement. In addition to pledging full cooperation, Grant Seeger, CEO of Security Corporation, says his company did “nothing inappropriate,” and processed all trades “in a cycle consistent with the normal course of business.” Also, he says, the company’s agreements with all its clients, including Canary, require them to make trades during normal business hours. Janus Capital Corp. could not be reached for comment. According to Spitzer, late trading at the 4 p.m. closing price of mutual fund shares is prohibited by New York State’s Martin Act and federal Securities and Exchange Commission regulations. Also, he says, mutual funds state in their prospectuses that they discourage or prohibit late trading. He adds, however, that the probe has turned up evidence that fund managers allow favored individuals and companies to engage in improper trading for payments and other inducements. Spitzer also says that his office will take measures to ensure that any illegal profits are returned to investors and that reforms are adopted to prevent after-hours trading at the close-of-business price.
A version of this story originally appeared in New York Law Journal, a sibling publication of Corporate Counsel and a part of American Lawyer Media.

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