NEW YORK – A New York judge Monday refused to dismiss charges against a former Bank of America Corp. (BAC) broker accused of helping to arrange millions of dollars of illegal mutual fund trades.
The decision means Theodore Sihpol (search), the first person arrested by New York Attorney General Eliot Spitzer (search) in his 18-month probe of the $8 trillion U.S. mutual fund industry, will stand trial beginning April 26.
Sihpol, 37, was accused of helping Canary Capital Partners LLC (search), a New Jersey-based hedge fund, trade illegally in Bank of America's Nations Funds mutual funds. He pleaded not guilty last April to 40 counts of fraud, grand larceny and falsifying business records, and remains free on $750,000 bail.
C. Evan Stewart, the lead lawyer for Sihpol, said the decision by New York Supreme Court Justice James Yates was not a surprise. Yates declined to reduce or dismiss any charges.
"The judge had signaled this was where he was going to come out" at a Feb. 22 hearing on the matter, said Stewart, a partner at Brown Raysman Millstein Felder & Steiner LLP.
The grand larceny counts carry potential prison terms of 8-1/3 to 25 years, while the fraud and records falsification counts carry potential four-year terms.
Bank of America, the No. 3 U.S. bank, fired Sihpol and others, including mutual fund chief Robert Gordon, after Spitzer in September 2003 accused several companies of allowing improper trading.
The Securities and Exchange Commission (search) last month approved a $675 million settlement with Charlotte, N.C.-based Bank of America, the largest accord yet to resolve allegations of illegal fund trading.
Regulators have imposed more than $2 billion of fines and other payouts in the fund scandal, involving such companies as Amvescap Plc's Invesco Funds Group Inc., Alliance Capital Management Holding LP and MFS Investment Management.
Canary settled with Spitzer for $40 million. Neither Canary nor Bank of America admitted or denied wrongdoing.
Spitzer accused Sihpol of arranging to give Canary an electronic trading platform to trade Nations funds as late as 8:30 p.m., yet still get the market-closing 4 p.m. price, known as net asset value, or NAV. He likened this "late trading" to betting on a completed horse race.
In a written decision, Yates accepted that some funds in the past regularly accepted trade orders after 4 p.m. if the orders were placed before the NAV was computed.
He also found merit to the argument that Sihpol might have lacked notice that merely facilitating trades made shortly after 4 p.m. was illegal.
But Yates also said there was grand jury testimony that "the defendant -- and many others -- intentionally helped Canary misrepresent the timing in order to execute trades that they knew would not otherwise be accepted." This, if proven, would be enough to sustain larceny and fraud charges, he said.
Yates also rejected prosecutors' contention that Sihpol stole $1.25 billion of fund shares from six companies. He said the "net value" of the alleged theft is "the difference in price between the current NAV and the next day's NAV," plus other economic losses reasonably suffered as a result.
Sihpol did not attend Monday's hearing. He is expected to attend a March 29 hearing on discovery issues. Lawyers in the case expect a trial to last six weeks to two months.