Reverberations from the mutual fund scandal continue, as the Securities and Exchange Commission last Thursday announced yet more market-timing and late-trading charges.
"We are continuing to bring cases for late trading and improper market timing," David S. Horowitz, assistant district administrator for the SEC's Philadelphia District Office, told Money Management Executive. "At some point, I assume there will be an end to it, but we are continuing to look at wrongdoing in this area where we see it."
This time, the SEC has filed three separate cases, two administrative and one in federal court in Philadelphia, and is continuing its investigation regarding one individual not yet named. Fiserv Securities (FSI) has settled its civil case with the SEC, agreeing to pay the piper $15 million for failure to supervise four employees' misconduct regarding market timing. As part of the same case, Dennis J. Donnelly, formerly executive vice president and COO, has been suspended for nine months and ordered to pay $50,000 in civil penalties.
Also, the SEC has sanctioned Charles J. Addeo, formerly vice president of mutual fund securities for FSI. Addeo, suspended for a full year, has agreed to cooperate with the SEC in ongoing investigations, pay a civil fine of $30,000.
Finally, the SEC has filed federal civil charges against Thomas J. Gerbasio and Raymond L. Braun, Jr. Gerbasio, at the time vice president of FSI's Philadelphia mutual fund department, was also in charge of the New York office that placed the trades. The agency determined that he received $454,797 in "ill-gotten gains," including commissions, salary and bonuses. Gerbasio has not yet settled with the SEC, but he and his counsel "are in active discussions with them and are hopeful that we are going to reach a settlement," said Lisa Matthewsonattorney with Welsh & Recker.
Braun, mutual funds operations supervisor of the New York office, reported to Gerbasio and has settled with the SEC. The agency determined that Braun received $125,318 in ill-gotten gains, specifically salary and bonuses, adding up to $133,576 including pre-judgment interest. He has been ordered to pay $20,000 and no civil penalty.
The SEC cases revolve around market timing that FSI conducted for a pair of hedge funds and the personal accounts of a senior vice president of FSI, whose case is still being investigated by the SEC.
Between August 2002 and October 2003 the firm handled 37,965 market-timing mutual fund trades for the hedge funds, earning the company $4.9 million in commissions and other fees. FSI also executed mote than 1,000 such trades for the SVP, who netted $922,000 between April, 2000 and October, 2002.
FSI generally does not deal directly with clients, but the hedge fund clients came to FSI through its 2002 acquisition of Investec/Ernst & Co. Even though these activities were a small part of the company's business, FSI was obliged to provide adequate supervision, Horowitz pointed out. "It's not an excuse that this was a new operation," he said. "It was an affirmative decision by Fiserv to take on this business."
Part of the problem was that Donnelly, who had oversight responsibility for the office and its activities, was spread thin and failed to follow up on complaint letters from mutual funds regarding trading activities from the hedge funds and FSI executive, Horowitz said.
"Letters from mutual funds are red flags," he stated. "As a supervisor he's supposed to respond to those red flags." FSI received "hundreds" of such letters from fund companies, according to SEC documents.
Gerbasio and Braun helped the hedge funds disguise their market-timing activities by changing names and account numbers, opening 62 accounts in all. Gerbasio also instructed the staff to tell the fund companies that trades were not for market timing. Addeo assisted both the FSI executive and the hedge funds in circumventing fund company scrutiny and outright violating fund rules regarding trades.