Former head of Canary Capital Partners, Edward Stern, testified recently that a former BoA broker was largely unaware of any illegal trading activity taking place at his firm. Stern made his recent remarks at the criminal trial of former Bank of America broker Theodore C. Sihpol III.
During his much-anticipated testimony, Stern said he was uncomfortable putting anything in writing regarding the arrangement his hedge fund had with the bank to trade after the close. He also told the court that he never expressed those concerns to Sihpol nor did he believe that Sihpol had a comprehensive understanding of how mutual fund shares were traded.
Memory Bank
Stern acknowledged that the trades gave Canary an edge over long-term shareholders. In retrospect, it was unfair, testified Stern, who has been widely maligned both inside and outside the industry.
Overall, the testimony was consistent with what Sihpols lawyers have argued previously, that he was not well versed in mutual fund trading and that he ran every decision by his superiors.
Sterns testimony broke 20 months of silence. At the outset of the scandal, his Secaucus, N.J.-based firm paid $40 million to settle late-trading allegations with New York State Attorney General Eliot Spitzer.
Stern is cooperating with Spitzer, likely as a stipulation of the settlement. Sihpol, 37, faces up to 30 years in jail if found guilty on all counts of fraud.
Time-Stamp Scam
Sterns testimony followed an admission by Noah Lerner, one of his firms leading brokers, that the trade Canary placed with Sihpol was a late trade.
Lerner told the court a few days earlier that he asked Sihpol to buy $10 million worth of shares in three mutual funds run by BoAs Nations Funds. Lerner said he submitted the request at 4:11 p.m. on May 16, 2001, 11 minutes after the close on the New York Stock Exchange.
I got to find my technician, and, uh, we will make it happen, Sihpol was heard telling Lerner in a taped telephone conversation played in the Manhattan courtroom.
Lerner told the court he understood the word technician to mean that Sihpol would have someone in the back office stamp order tickets with a time before 4 p.m. The May 16 order tickets were stamped 3:45 p.m., he said.
The prosecution is seeking to demonstrate that Sihpol knew that the trades on behalf of Canary after 4 p.m. were illegal, and that he sought to hide them by falsifying their order tickets.
Sihpol is accused of helping now-defunct Canary to engage in the illegal late trading of mutual funds.
While James Connolly, the former vice chairman of Fred Alger Management has been incarcerated in Sing-Sing for destroying market-timing and late-trading evidence, Sihpols trial is the first criminal proceeding stemming from Spitzers investigations into trading infractions in the $8.1 trillion mutual fund industry.
Sihpol, indicted last year for larceny, securities fraud and falsifying business records, facilitated Canarys late trading in the Nations Funds and other mutual fund families, said Spitzer, whose office arrested Sihpol on Sept. 16, 2003, 13 days after the New York A.G. launched his mutual fund probe.
Sihpol has pleaded not guilty. As previously reported by Money Management Executive, attorneys for Sihpol have argued that late trading is not explicitly illegal and that their client never intended to commit a crime.
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