The Securities and Exchange Commission has charged five former portfolio managers of two registered investment advisory firms, LP Advisors and Freedom Capital, with allowing hedge fund clients to late trade mutual funds in 2002 and 2003. The five are David Byck, William Cole, Charles Irwin, Michael Price and Jay Sumner.
The SEC also said that while they initially submitted at least 52 late-trade mutual fund orders through broker/dealer JB Oxford Holdings, they later created sham third-party 401(k) administrators to submit $268 million worth of late trades on behalf of their hedge fund clients to National Securities Clearing Corp. They charged their hedge funds an annual wrap fee of 2.5% to process these improper trades, twice the fee that LP Advisors and Freedom Capital charged for trades placed through broker/dealers. The profit to the hedge fund clients exceeded $4 million, while the respondents earned nearly $600,000 in wrap fees from the illegal trades.
The five have each been barred from the industry for five years and fined a total of approximately $340,000 in disgorgement and interest. Byck’s fine is more than $143,000, Cole’s and Summer’s $37,000 each and Irwin and Price $61,000 each. However, the SEC is waiving $22,838.69 of Irwin’s and Price’s fine due to their sworn testimonies as to their financial conditions.
All five consented to the order without admitting or denying the findings.