NEW YORK – A former Bank of America Corp. (BAC) broker was charged with larceny and securities fraud Tuesday, the first person to face criminal prosecution in the sweeping investigation into mutual fund trading.
The U.S. Securities and Exchange Commission (search) also filed charges against Sihpol, who officials said has surrendered to authorities and is slated to be arraigned this afternoon.
"This is a wide-ranging and continuing investigation, which is likely to result in numerous other charges," Spitzer said at a press conference. "The behavior, if proven, egregiously violates the criminal law."
The joint action between New York and the SEC reflects a commitment to aid each other in one of the biggest ever investigations into the $6.9 trillion mutual fund business. SEC Chairman William Donaldson pledged on Sunday that the SEC would work jointly with state regulators to enforce securities laws.
In an interview Tuesday, Spitzer said the investigation will go "vertically and laterally from here," possibly leading "up the chain" to other individuals, as well as to other mutual fund companies or hedge funds.
Other Bank of America employees who have been connected to the allegations and have since been let go by the bank are Robert Gordon, the head of its mutual fund unit, and Charles Bryceland, who ran the brokerage for wealthy clients.
The charges "certainly are a further sign that Spitzer thinks he has some very compelling evidence" in the investigation, said fund industry analyst Russel Kinnel of research firm Morningstar Inc.
Stephen Cutler, the SEC's chief of enforcement, announced civil charges against Sihpol. The SEC said it is seeking disgorgement of proceeds that Sihpol, 36, earned for aiding the trades.
Separately on Tuesday, Massachusetts regulators subpoenaed mutual fund provider Putnam Investments in an investigation into trading violations.
Sihpol is being charged with grand larceny, a felony that carries a prison sentence of between eight years and 25 years upon conviction. The securities fraud charge, also a felony, carries a maximum sentence of four years.
The charges are the first to stem from an investigation into after market trading of mutual funds. Trading after the market closes is prohibited because it allows the favored investor to take advantage of post-market events that would not be reflected in the share price until the following day.
Sihpol helped New Jersey hedge fund Canary Capital Partners (search) make trades several hours after the market closed, according to regulators. Spitzer first defined Sihpol's role earlier this month when he announced a $40 million settlement with Canary.
Sihpol took part in the trading scheme, according to Canary, as well as his own testimony to authorities, which was released in the complaint filed Tuesday.
Sihpol on Aug. 6 told Spitzer investigator Brenda Blaise he would receive orders from Canary before 4 p.m. EDT, when the market closes. He would then wait for instructions to either process or discard the trades, according to the complaint.
Anthony Goodwin, who was a trader at Canary in 2000 and 2001, testified that "no order was to be placed unless and until the defendant (Sihpol) received Canary's post-4 p.m call," according to the complaint.
Edward Stern, the managing principal of Canary who has settled with Spitzer's office, testified that Canary routinely engaged in late trading with Sihpol.
Sihpol did not immediately return calls made to his home in New Canaan, Conn. Sihpol's lawyer, Don Buchwald, also was not immediately available for comment.
Bob Stickler, a Bank of America spokesman, said the bank is cooperating fully with law enforcement and regulatory agency inquiries.
In the complaint filed against Canary earlier this month, Spitzer also said Bank One Corp.'s One Group Funds, Janus Capital Group Inc. and Strong Capital Management Inc. had taken part in improper mutual fund trading.
Bank of America also violated a fiduciary duty to investors by allowing Canary to make daily trades in and out of its funds to take advantage of inefficiencies in how the shares are valued, a practice known as market timing, the complaint said.