The Securities and Exchange Commission and New York Attorney General Eliot Spitzer are now investigating banks and specifically whether certain banks violated securities laws by extending credit to cash-loaded improper traders like hedge funds, according to published reports.
Spitzer told The Washington Post that the first phase of the investigation, which has already resulted in charges being brought against six mutual fund firms, has led him to start questioning how the market timing trades were financed. He did not mention any individual firms, but sources cite Bank of America and Canadian Imperial Bank of Commerce as two of the many banks both Spitzer and SEC enforcement head Stephen M. Cutler are probing.
"Financing activity that you know or have reason to know is illegal is itself an illegal act," Cutler told The Post. He added that if banks turn out to be guilty, "We will aggressively pursue them."
A spokesman for Bank of America, a clear player in much of the financing of hedge funds that timed the market, told The Wall Street Journal his bank had not dealt with market-timing hedge funds since the fall. BoA was named in the first action of Spitzers scandal, which resulted in a settlement by the hedge fund Canary Capital and punishment against its broker, Theodore Sihpol. Bank of America, according to a civil charge, extended $75 million to Canary before Sihpol used the money for both market timing and illegal late trades.
Hedge funds often borrow money from securities firms before diving into the market, and that is where the possible charges of "aiding and abetting" ala Enrons financial institutions could arise. Sources told The Journal that Spitzer and the SEC are especially concerned with hedge funds that borrowed more than 50% of the money they used to time the market.
Spitzer defended the latest wing of his investigation, saying that the role of banks is important. "We always ask ourselves, 'Is this case worth doing?" Spitzer told The Post. "Does it send a message?"
Obviously, he thinks this does.