Hedge fund to settle case with N.J. for $10M

Wednesday, January 18, 2006
Associated Press

Defunct hedge fund Canary Capital Partners LLC has agreed to pay the state $10 million to settle allegations it stacked the deck against ordinary investors, the New Jersey Attorney General's office said Tuesday.

Secaucus-based Canary, two of its units and managing principal Edward J. Stern were accused of trading after hours, when mutual fund prices are frozen, to reap profits from after-hours events that affect a stock's price the next day.

In addition, Canary and Stern were accused of engaging in market timing, or making trades into and out of funds to take advantage of short-term market fluctuations at the expense of long-term shareholders.

"The whole idea of our marketplace is that they're supposed to be fair and open and that everyone gets a fair shot," said Franklin Widmann, chief of the state Bureau of Securities.

"They weren't playing that way. They set up a situation where they concealed and disguised the nature of their trading."

Ron Simoncini, a spokesman for Canary Capital, said the company was not commenting Tuesday.

Stern - the youngest scion of the family that owns developer Hartz Mountain Industries - sparked a sweeping probe of the mutual fund industry when he struck a deal with New York Attorney General Eliot Spitzer in September 2003.

Stern paid $40 million to Spitzer's office to escape prosecution for illegal trading, and agreed to cooperate with the attorney general's investigation.

The probe shook the industry and resulted in scores of people fired and dozens of firms under scrutiny.

They paid out more than $1.5 billion in settlements.

Stern testified for the prosecution last year in the trial of Bank of America broker Ted Sihpol, who was accused of larceny, securities fraud and other charges related to mutual fund trading with Canary. Stern told a Manhattan court that his trading gave him an "unfair" edge over other investors.

A jury cleared Sihpol of 29 counts and the remainder were dropped.

Canary's payment to New Jersey is tied for the third-largest ever paid to the state to settle securities violations, said Peter Aseltine, a spokesman for the Attorney General's office.

As part of the settlement, Stern and Canary have agreed to be barred from acting as brokers or investment advisers for 13 years.

Last week, UBS Financial Services Inc. agreed to pay New Jersey nearly $25 million - the largest sum ever collected in a state securities matter - to settle allegations that it failed to properly supervise brokers who engaged in deceptive market-timing activities.

The UBS payment to New Jersey included a civil penalty of $12.75 million and an additional $12 million for investigative costs, investor education and other enforcement initiatives.

Staff Writer Hugh Morley contributed to this article.

The original appears here.

-- MDT

Labels: Eliot Spitzer, New York AG