NEW YORK - Ted Sihpol's future hangs in the balance.

The jury in the criminal case against former Bank of America broker Theodore C. Sihpol III began deliberations on Thursday, as jurors spent the latter part of the week considering the 33 counts of grand larceny, securities fraud and falsifying business records hanging over the lone employee on trial for the bank's alleged trading abuses.

Manhattan Supreme Court Justice James Yates presided over closing arguments from both sides last week before sending the jury out to decide whether Sihpol had criminal intent to defraud six mutual funds when he helped Canary Capital Partners engage in a late-trading scheme that gave the hedge fund an unfair advantage over long-term shareholders. If convicted, Sihpol faces up to 30 years in prison.

The trial, in its sixth week and still up in the air as of press time, serves as a critical test for New York Attorney General Eliot Spitzer, who launched a widespread investigation of mutual fund trading practices in September 2003.

Many of the facts laid out for the jury during the course of the trial have been undisputed, which is unusual in a criminal case. The crux of the case is really Sihpol's mindset, that is, whether he acted with criminal intent to defraud.

Assistant Attorney General Harold Wilson, the lead prosecutor, argued in his summation Wednesday that Sihpol knew that Canary was making trading decisions after the market close yet willfully deceived his bosses, falsified order tickets and tried to cover his tracks to protect what was a lucrative deal.

The state attorneys claim Sihpol oversaw a two-step process in which Canary called in trades early in the day and was later permitted to execute, cancel or change the number of shares after 4 p.m., despite having submitted an order ticket with a pre-4 p.m. time stamp. As a result, Sihpol, who was fingered as the point person for Canary, took home $600,000 in compensation in 2002 and $700,000 in 2003.

Tale of the Tapes

Wilson told the jury that Sihpol is a "fraudster" who lied repeatedly even though he "knew all along it was false," which "speaks volumes on his intent." To illustrate his point, Wilson played several taped conversations Sihpol had with former Canary executive Noah Lerner, one of which the prosecution argues depicts the two trying to corroborate their story in the event that people start asking questions, "a wink-wink, nudge-nudge" maneuver of sorts.

Sihpol: Ah, one thing if it ever comes up between you and I, you need to know-I'm sure you know the right answer, but it came up today in conversation. You guys make all your investment decisions before 4 o'clock, correct?

Lerner: Absolutely.

Sihpol: OK, good. That's all I need to know.

Wilson characterized the call as "a conspiratorial act to make sure Lerner would back up his lies." Michael Brown, one of Sihpol's superiors, testified that Sihpol told him that he was getting the trades before 4 p.m. and that everything was going smoothly. Wilson argued that Sihpol intended to mislead Brown when "he left out a universe of pertinent information" related to the Canary trades including the phone calls after the bell and "the technician" who doctored the time stamps.

"Mr. Sihpol knew the rule, he just avoided it with Noah Lerner," Wilson said.

In another recorded phone conversation, Sihpol tells Lerner: "If Canary ever gets audited, and it comes out there, before 5:30, they make investment decisions after the market closes, there could be real problems as us being their brokers and not have done our due diligence...Anyway I'm just all worked up, but I just wanted you to make sure that could be an issue potentially."

Other conversations reveal that Sihpol hatched a plan to "stamp a bunch of tickets every day" prior to the market close and alter them after 4 p.m. when he received a phone call from someone at Canary. "His lies prove his intent," Wilson said, finishing up his four-hour summation.

Just Following Orders

Defense attorney Paul Schectman of New York's Stillman & Friedman delivered his closing arguments on Tuesday, telling the jury that Sihpol never intended to commit a crime and was merely acting as an order-taker who cleared all arrangements with his superiors. In fact, Schectman demonstrated to the jury that other employees in the bank's private client services and broker/dealer services groups knew about the trades, and made no attempt to conceal the arrangement with Canary.

Schectman also pointed out that the trading requirements spelled out in Bank of America's compliance manual, an unwieldy two-to-three-inch document, made no mention of a specific time by which trades must be placed. In fact, Sihpol's attorney told the jurors, many brokerage desks execute trades well after the market close simply because of their sheer volume. "Everyone knows they are trading electronically after 6 o'clock at this bank," Schectman said, citing letters and e-mails that were distributed to many of the bank's employees.

While acknowledging that the bank breached its prospectus by receiving orders after the close, Schectman reminded the jury of the charges in the case. "It's not a contract case," he said. "Ted Sihpol is not on trial for violating Bank of America's compliance manual." He also submitted that Sihpol didn't even read the prospectuses for the funds he was selling, to which none of the prosecution's witnesses testified to the contrary.

Singled Out

To further support his claim that Sihpol had no criminal intent, Schectman reviewed testimony and evidence that suggested that everyone on the BoA trading desk who reported to Michael Tierney, a managing director at the bank, knew the specifics of the Canary arrangement and that nothing was said in "code or hush tones." Schectman even placed a diagram on the overhead that showed how members of Tierney's team worked in such close proximity to one another, making it extremely difficult for the brokers not to hear each other's conversations.

Essentially, the logic behind the defense's argument is that Sihpol is being singled out for something that was common knowledge on the desk and in the back office and had many different fingerprints on it. Schectman said if Sihpol is guilty of a crime, then Bank of America's Matt Augugliaro, who set up Canary's electronic trading desk and set the after-hours deadline for trades, and Sihpol's superior Tierney, should also be on the hook.

Schectman scoffed at the notion that Sihpol stole $2.3 billion in mutual fund shares. "He barely had any involvement," Schectman argued over the seven counts of grand larceny, the most serious charges on the docket. "There are two people in the history of the world that stole more than $2 billion: Saddam Hussein and Ted Sihpol," he said mockingly of charges he has previously called "nonsense on stilts."

As for the technician who allegedly altered the time stamps, the defense pointed out that there was no evidence to support the claim that there even was a technician since the individual was never called as a witness. And the reference to "a case of beer" to grease the guy in the back office was merely an innocent joke, Schectman offered. "Where is the technician?" he asked as he looked around the courtroom.

In addition, Schectman said that Sihpol knew his phone calls were being recorded, and yet he spoke freely about the Canary deal. Sihpol's attorney further demonstrated that then-newbie broker Andrea Wenner, a witness for the prosecution, worked late in order to receive the Canary orders and even trained another young new employee, Stephanie Galiani, on the protocol for handling the late trades, again, in a very open fashion.

"She did not take her aside and say, Welcome to our ongoing criminal scheme,'" Schectman said sarcastically, accentuating his point that the Canary arrangement was not a clandestine operation.

Schectman's closing argument also pointed out that the bank would not let Wenner field any of the Canary calls until she passed her Series 7 exam. "When they knew about a rule, they followed it," Schectman said. But the prosecution countered that argument by saying that Wenner's licensing exam bears no relevance to the case because there was no cash at stake. "It didn't involve any sort of monetary benefit or trading advantage," Wilson said.

Standard Operating Procedure

Schectman told the jury that market timing and late trading were standard operating procedures at Canary well before Sihpol cold-called Edward Stern. He noted that Stern and Lerner both testified that they had developed the trading strategy with Kaplan brokers before ever getting involved with Bank of America. Schectman also said that it was common practice for clients invested in international mutual funds, to use an electronic trading model to market time, arbitrage and conduct other forms of complicated derivative trades, including two of Bank of America's other clients Trautman and Aurum. Essentially, it was part of the pre-existing culture at Canary.

On top of that, Canary had on legal authority from New York law firm LeBoeuf, Lamb, Greene & MacRae by way of Brean Murray that it was lawful to execute trades after 4 p.m. provided that it was prior to the net asset value (NAV) calculation.

Another reason Sihpol was confident that it was all on the up-and-up, the defense argued, was because Stern's father was billionaire Leonard Stern, for whom New York University's business school is named, a man with an excellent reputation in the business world.

Lerner and Stern, who were both granted immunity by the prosecution in exchange for their testimony, testified previously that they had no intent to defraud mutual funds.

Capitalism Not on Trial

In winding down his closing argument, Schectman urged the jury to carefully consider the consequences of a guilty verdict on even a few of the 33 counts, particularly the grand larceny charges. "Every one of those charges is a felony. Every single one is life destructive," Schectman stressed. Given the number of the charges and their severity, he cautioned against succumbing to the temptation to make an arbitrary decision on which counts to convict. "It's not about compromise for the sake of compromise. You must prove criminal intent."

Schectman also implored the jury to put any prejudices of Wall Street brokers they might have aside. "We live in a society where brokers make too much money and teachers make too little. Don't punish him for making a lot of money. Capitalism isn't on trial here."

Ultimately, the outcome of the trial figures to hinge on how the jury chooses to interpret the taped conversations, seeing as most of the facts of the case are undisputed. The prosecution played the tapes several times during the summation to really hammer home its point. The tone and inflection of Sihpol's voice during those conversations could weigh more heavily than the actual transcript itself.

Fair or not, with Stern and Lerner having been granted immunity and other members of Bank of America either off the hook or already square with regulators, Sihpol stands alone.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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