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Federal regulators Tuesday ordered the dissolution of Security Trust Co., N.A., an administrator of mutual-fund trades for retirement plans. At the same time, criminal charges against three former senior executives of the company were brought by New York Attorney General Eliot Spitzer. Spitzer’s complaint, filed in New York state court in Manhattan, accuses former chief executive Grant Seeger, former president William Kenyon and former head of corporate services Nicole McDermott of grand larceny, falsifying business records and securities fraud under the state’s Martin Act. If convicted of the most serious charges, they could face up to 25 years in prison. The officials’ actions resulted in larceny of more than $1 million, the attorney general said in a statement. At the same time, the U.S. Treasury Department’s Office of the Comptroller of Currency said it was directing the shutdown of the 12-year-old firm based in Phoenix. By order of the OCC, Security Trust will immediately begin the process of dissolving itself by March 31. The Securities and Exchange Commission has also filed related civil charges in federal court in Phoenix against the former executives and the firm. The actions are the latest developments in a widespread probe of illegal trading practices in the $7 trillion mutual-fund industry. The case marks the first time regulators have addressed illegal conduct of third parties or intermediaries in mutual-fund trading. It is also the first time regulators have forcefully shut the doors of a firm targeted in the probe, although it may not be the last. In testimony before Congress last week, Spitzer said some companies could close as a result of the investigation. “It’s fair to presume there will be criminal cases brought against firms. That may mean the death penalty for them. In my view that’s the only option we are now left with,” he said. Nevertheless, experts said the move against Security Trust is an unusually aggressive one, reflecting a sense that the firm was so corrupt that it could not be saved. Regulators said that Security Trust, which administers $13 billion in assets for 2,300 pension and retirement systems, processed late trades by hedge funds as if they were timely. Late trading is prohibited by New York law and SEC regulations because it permits a favored investor to take advantage of late-breaking market-moving news. Mutual funds are priced once a day, and all trades are due by 4 p.m. to get that day’s closing price. Orders submitted later are supposed to get the following day’s price. Security Trust deceived the mutual funds into making late trades by disguising the illegal trades as orders from one of their many client pension plans. Fund companies often let middlemen such as Security Trust submit trades after the close of U.S. markets to give them time to pool orders. MARKET TIMING The SEC also charged the company with illegal market timing on behalf of the hedge funds. Market timing refers to the practice of short-term buying and selling of mutual-fund shares in order to exploit inefficiencies in how the funds are priced. These trades were similarly disguised to trick the funds into making them. The hedge funds paid Security Trust nearly $6 million through a profit-sharing arrangement and custodial fees charged by the firm, according to the SEC complaint. Security Trust is the latest to be charged with illegal mutual-fund trading in the ongoing probe. Mutual funds Putnam Investments and PBHG have also been accused of wrongdoing, as have several individuals. Charges against Security Trust had been widely anticipated after it was mentioned in a Sept. 3 complaint filed by Spitzer accusing hedge fund Canary Capital LLC of improper fund trading. The attorney general alleged that Security Trust allowed the hedge funds to sneak in trades until 9 p.m. to take advantage of after-market events. The SEC complaint said that about 99 percent of the trades handled by Security Trust for Canary Capital were done after the market closed.

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