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Jury selection for former Bank of America broker Theodore Sihpol III started last week in New York state court. In a 40-count indictment, New York Attorney General Eliot Spitzer, as part of his office’s ongoing efforts to curb alleged abuses in the mutual fund industry, charged Sihpol for late trading by helping hedge fund Canary Capital Partners buy and sell mutual funds after trading hours. The trial before Manhattan supreme court Justice James Yates is the first high-profile case coming out of Spitzer’s probes into the mutual fund industry. To date, Spitzer has won national attention for entering into large settlements with the nation’s largest investment banks, insurance companies and mutual funds. Spitzer’s assault on the mutual fund industry began in September 2003, when he announced industrywide trading scams. From the outset, his focus was locked on late-trading practices. “The mutual fund industry operates on a double standard,” he said in a statement in 2003. “Certain companies and individuals have been given the opportunity to manipulate the system. They make illegal after-hours trades and improperly exploit market swings in ways that harm ordinary long-term investors.” Several of these arrangements involved Canary Capital. The hedge fund and its managing principal, Edward Stern, settled with Spitzer in September 2003 for $40 million. Sihpol’s case stems from a probe of Bank of America Corp., which in March 2004 paid $675 million to settle charges of fraudulent dealings with Canary Capital. Sihpol, 37, was the first individual to be charged in the mutual fund probe. The indictment accuses him of grand larceny, securities fraud under New York’s Martin Act and falsifying business records. Spitzer’s office claims that Sihpol stole more than $1 million from six different mutual funds operated by or affiliated with Bank of America by participating in the late-trading or market-timing scheme. If convicted, Sihpol could face more than 25 years in prison. According to the indictment, Sihpol set up the market-timing arrangement for the hedge fund. The scheme allowed Canary to trade mutual fund shares after hours. It allegedly worked like this: Canary would submit orders to purchase or sell mutual fund shares. Later, once it knew the closing price, it would decide whether to go ahead with the transaction. Sihpol’s lawyers, C. Evan Stewart of Brown Raysman Millstein Felder & Steiner and Paul Shechtman of Stillman & Friedman, both of New York, have argued in pretrial briefs that the charges against Sihpol are unprecedented for the decades-old $8 trillion dollar mutual fund industry. One defense expert, Yale Law School Professor Jonathan Macey, told Yates that neither the U.S. Securities and Exchange Commission nor the attorney general provided guidance on late trading. “I am aware of no independent or parallel criminal proceedings (state or federal) for alleged violations of ‘late trading’ being initiated prior to the action against Mr. Sihpol,” Macey said in his affidavit to the court. Stewart characterized the prosecution as “extraordinary” in court filings urging Yates to dismiss the charges because the alleged activities “were never considered criminal, prohibited by the securities laws, or deemed improper prior to Sihpol’s arrest” in September 2003. Stewart also argued in court filings that the attorney general has wrongly targeted a low-level employee in Sihpol, while skipping over his superiors at Bank of America and the defendant’s alleged co-conspirators at Canary Capital. The defense claims that Sihpol’s supervisors at Bank of America knew of, reviewed and approved the transactions now under question. These supervisors, Stewart has argued to the court, implemented much of the trading arrangement for which his client is now blamed.

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