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A former trader at the Millennium Partners hedge fund group pleaded guilty Thursday in Manhattan criminal court of illegally profiting from mutual fund prices in after-hours trading of shares. Steven B. Markovitz, 41, pleaded guilty to felony charges brought by New York State Attorney General Eliot Spitzer under New York’s Martin Act, General Business Law � 3.52-c(6). He faces up to four years in prison. Markovitz, the second hedge fund executive to face such charges since the attorney general began his probe into trading of mutual funds last month, has also agreed to cooperate in Spitzer’s investigation. In a related civil action, the U.S. Securities and Exchange Commission found in an administrative order that Markovitz committed securities fraud. In partial settlement of that action, Markovitz, who left Millennium Partners last month, has agreed to a lifetime ban from working with a registered investment company or mutual fund. The SEC is also seeking disgorgement and civil penalties in amounts that have yet to be determined. According to the criminal charges and the SEC findings, Markovitz, who started working at Millennium Partners in 1999, engaged in late trading of mutual fund shares on behalf of the $4 billion hedge fund. He would place mutual fund orders after the market closed at 4 p.m. but still get the prices for that day. Other times, the SEC found, he would place orders before 4 p.m., and then change or cancel them after hours. Markovitz’s actions let him take advantage of late-breaking news that would affect stock prices the next day. Spitzer has likened late trading to “betting on a horse race after the horses have crossed the finish line.” SEC rules require that orders placed after the close of the markets get the next day’s closing price. Neither the attorney general nor the SEC named the funds Markovitz traded or the brokers he used for the trades. Markovitz is the second person charged by Spitzer and the SEC for illegal trading of mutual funds. On Sept. 16, federal and state regulators accused former Bank of America broker Theodore C. Sihpol with assisting traders at the Canary Capital Partners LLC hedge fund in after-market trading. He has pleaded not guilty to the charges. On Sept. 3, Spitzer’s office obtained a settlement and cooperation agreement with Edward Stern of Canary Capital Partners LLC for alleged after-market fund trading. Canary agreed without admitting or denying any wrongdoing to disgorge $30 million in profits and pay a $10 million fine. The attorney general has requested information from at least 20 other companies, and the probe has shaken up the $6.9 trillion mutual fund industry. Bank of America has fired three executives in its mutual fund division and Prudential Securities has reportedly fired a dozen people. Alliance Capital Management Holding LP has suspended two employees for “conflicts of interest” that benefited Alliance’s hedge fund operations at the expense of investors in Alliance mutual funds handled by the same portfolio manager. Bank of America and Janus Capital Group Inc. have also publicly agreed to reimburse any investors injured by illegal mutual fund trading, and are conducting reviews to determine losses. Earlier this week, SEC staffers issued a report and recommendations on the hedge fund industry. One suggestion floated was that all hedge fund managers be registered, a first step toward tightening oversight of the largely unregulated industry. This latest probe marks at least the third high-profile investigation in which Spitzer has invoked the Martin Act, considered the toughest securities law in the country. Last year, he wielded his authority under the act to probe stock analysts’ conflicts of interest, eventually forcing an industry-wide settlement requiring Wall Street firms to separate their investment banking and research functions and provide objective stock research to small investors. Spitzer also sued several corporate executives under the act for “spinning” stock, or accepting shares of hot initial public offerings in exchange for awarding their companies’ banking business to a particular firm. David J. Kaufmann, a partner at Kaufmann, Feiner, Yamin, Gildin & Robbins and an expert on the Martin Act, said the charges against Markovitz represented “a classic use of the Martin Act.” “It’s a species of trading activity that defrauded investors in large mutual funds,” he explained. “Any investment fraud, from the sale of burial plots to gold coins to securities for the purposes of investment are going to be covered by the Martin Act.”

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