In what could set a new precedent in the persisting mutual fund scandal, Federal prosecutors have filed criminal charges against a former broker at Prudential Securities for wire and securities fraud related to mutual fund market timing.
According to court documents filed by the U.S. Attorney General's office in Boston on Aug. 2, Skifter Ajro, 37, is accused of being a member of a group of brokers in Prudential's Boston offices that engaged in deceptive and fraudulent trading in shares of mutual funds between August 2001 and October 2003.
Two years ago, the Massachusetts Securities Division and the Securities and Exchange Commission brought civil charges against the brokers. The brokers denied those charges.
In addition to Ajro, of Milford, Mass., that case also named Justin Ficken, John Peffer, Marc Bilotti, Martin Druffner and their manager Robert E. Shannon. All of the men stepped down in wake of the allegations.
According to David Bergers, head of enforcement at the SEC's Boston office, the case is still pending and is expected to go to trial sometime next year.
The allegations filed against Ajro last week, however, mark the first time criminal charges would be sought against an individual for market timing.
Former Bank of America broker Theodore Sihpol III was acquitted two months ago in New York State Supreme Court on 29 criminal charges for late trading, He is scheduled to reappear in court on the final four charges Aug. 22 to wrangle over the final four counts for fraud and falsifying business records, which were thrown out of the original trial.
Inform, Not Indict
But since Ajro's charges - two counts of wire fraud and two counts of securities fraud - were brought within what's called an "information," rather than an "indictment," it appears likely that a plea bargain in return for some sort of testimony might be struck before the case goes to court.
That could also be a hint, experts told MME last week, that federal prosecutors might be working their way up the ladder in search of bigger fish. A key criticism in New York Attorney General Eliot Spitzer's failed case against Sihpol is that the prosecutor should have gone after the major players in the late-trading scheme, rather than allowing plea bargains in exchange for information on a bit player, who the jury ultimately recognized was caught up in a far bigger scheme.
Ajro was a junior broker, a relatively low-level position, at Prudential.
Federal regulators indicated last week that the investigation, conducted in conjunction with the U.S. Postal Service, the SEC and Secretary of the Commonwealth William F. Galvin's Securities Division, is continuing.
Officials at Newark, N.J.-based Prudential Financial - Prudential Securities was merged with Wachovia Securities in 2003 - would not comment on the case, but said it was fully cooperating with investigators.
Ajro's attorney, Daniel Rabinovitz, did not return repeated telephone calls seeking comment. When news of the allegations against his client broke last week, however, Rabinovitz remarked that, when details of market timing at Prudential become public, "We are hopeful these charges will be resolved in a way that is favorable to Mr. Ajro."
Officials with the U.S. Attorney's office in Boston also declined to talk about the ongoing investigation. Nonetheless, their court documents claim that Ajro helped execute the market-timing trades on behalf of seven hedge funds. For his work, Ajro allegedly generated $700,000 in gross commissions and more than $200,000 in net commissions for himself. If convicted, he faces up to 20 years in prison and upwards of $10.5 million in fines.
Court documents reveal, however, that the market timing was far from a one-man operation and that it was a finely orchestrated scheme that the targeted mutual fund groups aggressively fought to block.
According to federal prosecutors, Ajro joined a group of brokers, who were nicknamed the "Druffner Group" after broker Martin Druffner, at Prudential around April 2001.
A college buddy of Druffner, Ajro joined the group at the height of its market-timing activities, which were allegedly done on behalf of the following hedge funds: William Lester Partners and Chronos of Massachusetts; Headstart Advisers and Pentagon Capital Management of the United Kingdom; Ritchie Capital Management in Illinois; Jemmco Capital in New York; and Graham Capital Management of Connecticut.
Ajro also arrived at a time when, court papers say, the Druffner Group was receiving notification from multiple mutual fund groups that their market timing would not be tolerated and that trades containing the FA numbers, or representative numbers, of particular brokers, as well as those containing the names of particular clients the trades were being made on behalf of, would no longer be accepted.
Entrusted With Millions
"I am glad you are here," Druffner allegedly told Ajro upon his arrival, "because now we can split up the accounts using more rep numbers."
Almost immediately after receiving his new FA number, millions of dollars of assets were put under Ajro's name, documents claim.
The Druffner Group would also try and deceive the mutual fund groups by changing the names of clients listed on the trades. That would include, documents say, identifying the hedge fund client with the name of a family dog, the nickname of a girlfriend of one of the hedge fund employees, various street names in neighborhoods where hedge fund personnel lived, or, in the case of two accounts, the name of an employee in the back office of Prudential.
The brokers also covered their tracks, court papers indicate, by "making affirmative misrepresentations and material omissions to employees at fund companies about the true nature and extent of the Druffner Group's market-timing trading."
The fund groups, meanwhile, would uncover one new FA number only to be duped later by a different one. And as soon as they identified a renamed client as a previous market-timer, the broker would tack a different name to the trades.
And when confronted directly, court papers say, the Druffner Group denied any impropriety. And after every such communication, prosecutors claim, the brokers blatantly disregarded the fund groups pleas, returned to market timing millions of dollars worth of trades for their hedge funds clients, and the vicious cycle was begun all over again.
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