In a turn of events that 25 months ago would have seemed unthinkable, former Bank of America Securities broker Theodore Sihpol III walked out of a Manhattan courtroom last week absolved of all securities fraud charges.
New York Attorney General Eliot Spitzer last Wednesday dismissed the final four charges against Sihpol, who was acquitted in June on 29 other criminal counts for allegedly helping a hedge fund make illegal late trades after the bell, closing a high-profile case that started with a roar and ended with a whimper.
Earlier in the day, Sihpol settled civil fraud charges with the Securities and Exchange Commission. Without admitting or denying wrongdoing, the 38-year-old New Canaan, Conn., resident agreed to a $200,000 penalty and a five-year ban from the securities industry.
Exiting New York Supreme Court, Sihpol only remarked, "I feel great." Sihpol's attorney, C. Evan Stewart, a partner with the New York law firm Brown Raysman, called it "a great day" for his client.
"He has resolved all of his proceedings with the government, and now he is able to put those in the rear-view mirror and go on with his life," Stewart said. Unable to work in the securities industry for the foreseeable future, Sihpol is now assessing his options, but remains healthy and is looking forward to spending time with his wife, Rhonda, and their three-year-old son, Stewart said. "He's a tri-athlete, so he's been taking care of himself throughout this ordeal and is in good health. He's now in a position to think about what he can do. He couldn't do that after [the June acquittal]," Stewart said.
The attorney general's lead prosecutor, Harold Wilson, told Justice James A. Yates that considering the SEC development, Sihpol's admission in court that he had disadvantaged other BoA mutual fund shareholders by allowing Edward Stern of Canary Capital Partners to trade late, and the jury's acquittal in June, "the interests of justice have been served."
Asked whether the SEC was completely satisfied in the outcome of its case against Sihpol, Alexander M. Vasilescu, regional trial counsel for the SEC's Northeast regional office, said, "the Commission feels it is a substantial penalty" and one that fits the charges. Vasilescu also noted that the regulator obtained a federal judgment penalty, rather than a commission judgment, which expedites collection. "And there's the five-year timeout. That's substantial," he said.
Jake Zamansky of Zamansky & Associates, a New York law firm that represents investors in arbitration proceedings against brokers, also called the SEC penalty substantial. "I sat in the courtroom for most of the trial, and what you have is an individual, who's 35-years-old or so with a wife and child, so $200,000 is a real jolt. For Ed Stern to settle with Spitzer for $40 million, that's nothing. For Sihpol, this is a substantial penalty."
Ironically, Zamansky added, the SEC and not Spitzer emerged as the authority in the case. When Spitzer broke the case in September of 2003, he chided the regulator for being oblivious and even demanded that the then-director of the SEC's division of investment management, Paul Roye, step down.
"It looks to me like the SEC showed him up and that the tables may have turned," commented Zamansky, who reiterated an earlier claim that Spitzer should have gone after the bigger fish in the case. Instead, he said, the attorney general spent "millions of dollars" chasing a bit player in the scheme.
"It's a big blow to Spitzer. A lot of people will now perceive him as a paper tiger and will challenge him," Zamansky said.
J&W Seligman is doing just that. After admitting to four cases of market timing and agreeing to pay a $2 million penalty, the firm claims that Spitzer's orders for it to reveal information about its fees is a case of the A.G. overstepping his authority. Ken Langone, former chairman of the New York Stock Exchange's compensation committee, is being sued by Spitzer and is refusing to settle out of court. Former American International Group chief executive Maurice "Hank" Greenberg said Spitzer pressured the insurer to make unnecessary accounting changes in the wake of an investigation.
Ross Albert, a partner with the Atlanta law firm Morris Manning & Martin and a former senior special counsel in the SEC's division of enforcement, said the outcome of the Sihpol case reveals that retrying the former broker on the remaining counts "was not something Spitzer and his office relished," adding, "considering the timing of the SEC settlement, it appears this was an opportunity for Spitzer to save face."
But, he continued, it could also be argued that the case distinguishes between the individual and the institution. In that sense, Spitzer may have, as Wilson suggested, determined that the SEC penalty was sufficient.
"Spitzer would argue for us to not look at the tree, Ted Sihpol, but rather the forest, which would be the industry. Look at the deterrent aspect of it. That's the significant issue here, not the individual. Everybody now knows that if you [trade late] you run the risk of going to jail," Albert said, adding that for all the recent backlash against the attorney general, "he has found some problems in the financial services industry that the SEC was slow to react to and has done a lot for shareholders."
After last week's events, Spitzer's office noted that through his investigation of the mutual fund industry, eight people have pleaded guilty to criminal charges, and civil settlements have been reached against 12 companies. The investigation has further brought an estimated $3 billion in fines and lowered fees.
What the Sihpol case clearly has not done is bring the industry any closer to a definition of late trading. The SEC is still wrestling over how it might make its 4 p.m. hard-close proposal work in an industry that executes thousands of trades daily across three time zones. The rule is currently pending before the Commission.
"As it turns out, it appears this case was much-ado about nothing," Zamansky said. "There needs to be a much finer line. It remains a gray area. Brokers and traders need to know where that line is, because they now know the consequences if they cross it."
Stewart agrees. He thinks the industry will continue to struggle with cases of late trading until a deadline is clearly established.
"The practical lesson here is that whatever laissez-fare attitudes that existed around this before, no longer do," he said.
(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.