NEW YORK - The biggest criminal trial in mutual fund history is nearing judgment day as both sides gear up for their summations, but not before some interesting twists and turns.
Defense attorneys in the case against former Bank of America broker Theodore C. Sihpol III rested last Wednesday without calling a single witness, after the judge dismissed seven counts of fraud related to destroying or falsifying business records.
Presiding over the New York State Supreme Court in Manhattan, Judge James Yates granted the defense's motion to dismiss five counts of falsifying records on grounds that any trade order tickets that were discarded before they could be executed could not be considered official business records.
Basically, the judge ruled that ripped-up tickets do not meet the criteria of official business records under the law.
In the alleged fraudulent scheme, Sihpol held the tickets until he received a telephone call from someone at now-defunct hedge fund Canary Capital Partners after the closing bell, instructing him to either put the trade through or cancel it.
Four counts of fraud accused Sihpol of throwing away order tickets after Canary canceled them. Another one alleged Sihpol altered the time stamp on the order before completing the transaction.
The prosecution pushed hard to keep the count related to the fudged ticket on the books but the defense pushed back, calling the charge "nonsense on stilts."
In the end, the judge scrapped the charges, and the prosecution withdrew two other counts because it could not provide sufficient proof to the court.
"I'd like to live my life without going through futile gestures," Yates told the court as he dismissed the charges.
Still on the Hook for Grand Larceny
Despite the dismissal of some of the charges, Sihpol still faces up to 30 years in prison for 33 counts, including seven counts of grand larceny, four counts of securities fraud and 22 counts of falsifying business records.
The most serious of the charges is first-degree grand larceny, which could land the 37-year-old New Canaan, Conn., resident in jail for 25 years on its own. Sihpol is accused of helping Canary to trade rapidly in and out of six mutual funds sold through Bank of America in a scheme that bilked long-term shareholders and generated higher fees for the bank.
The trial hinges upon whether Sihpol knew late trading was wrong or if he was simply an order-taker following the instructions of his superiors.
The prosecution claims that Sihpol stole millions of dollars from six mutual funds through $2.3 billion in improper trades. The defense argues that he didn't know what he was doing was unlawful and cleared every new agreement or transaction with his bosses, none of whom have been indicted on criminal charges.
Industry observers view the trial as a litmus test for New York Attorney General Eliot Spitzer, who in September 2003 began his crusade against widespread trading abuse by going after a number of the nation's top mutual fund complexes, a probe that has yielded hefty fines, fee cuts and sanctions.
Bank of America has already paid $675 million to settle charges with regulators while former Canary chieftain Edward Stern paid $40 million to put the scandal behind him, leaving Sihpol as the lone individual on the hook for criminal charges in the matter.
Sihpol, dressed in a pink tie, pink shirt and navy suit, appeared calm and confident in the courtroom and even laughed at jokes made by his attorney and the judge. The baby-faced, balding defendant was overheard chatting casually outside the courtroom about installing a new stereo system in his Connecticut home.
Expert Witness Denied
A key blow to the defense's case was the judge's ruling on its star witness, Jonathan Macey, a securities law professor at Yale University.
Macey is an expert on mutual fund pricing and Rule 22c-1 of the Investment Company Act of 1940, which requires "forward pricing," whereby shareholders buying or redeeming shares must receive the next computed share price following the fund's receipt of the trade order. For trades placed after 4 p.m., that would effectively mean the next day's price.
The defense was hoping Macey could tell the jury that late trading was within the law provided that it was done prior to the net asset value (NAV) calculation. Paul Schectman, one of Sihpol's attorneys, said he was counting on Macey to testify "the conduct here was lawful, or at least that Sihpol had a reasonable belief that it was lawful."
However, the judge ruled that Macey could only testify as to what was custom and practice in the mutual fund industry regarding late trades and not his interpretation of the law. Yates ruled that "the law is decided by the court, not by an expert," Schectman told reporters outside the courtroom. As a result, the defense pulled the plug on Macey, likely figuring there was little upside and significant downside to a law expert appearing before the jury to discuss industry practices. Instead, team Sihpol submitted Macey's sworn affidavit on mutual fund pricing and late trades.
"Obviously, we're very disappointed," Schectman said. "But [he] is a very good trial judge, and we have to live by his rules."
Macey's testimony would have subverted the prosecution's argument that there was criminal intent to defraud, which, ultimately, the prosecution must convince the jury.
Proving Criminal Intent
Defining intent to defraud was a major source of contention for both sides, but eventually the prosecution won out.
The defense argued that in order to prove intent to defraud, the law requires it to include the intent to obtain property. The prosecution, however, countered that intent to defraud stands on its own merit and does not require the additional stipulation.
While the judge agreed with the defense on intent as a practical matter, he would not dismiss the charges. The judge admitted he would struggle with how to instruct the jury on that issue.
Another sticking point was the charge that Sihpol intended to defraud 10 or more people. In order to meet that requirement of the statute, the prosecution added eight Bank of America employees to the six mutual funds Spitzer said were victimized by the alleged improper trades.
Assistant Attorney General Harold Wilson said that Sihpol defrauded those who were responsible for putting through the trade orders. The defense, while acknowledging that six entities were involved, strongly objected to the inclusion of the bank employees because they were not in the original complaint.
Before dismissing the jury for the day, the judge cautioned the panel not to succumb to the temptation of making a decision on the trial before hearing the closing arguments from the lawyers, what the law requires and what their fellow jurors have to say.
"It's easy to agree with yourself," the charismatic Yates said, adding that it's a little more difficult to listen to others who may have a different perspective.
Closing arguments for both sides are scheduled for Tuesday, May 31. The jury is expected to reach a decision in early June.
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