Market Timing Fraud Prosecutions
1. SEC v. David L. Winton (2003, New York)
Facts: Winton, a hedge fund manager, engaged in market timing by placing rapid, large trades in mutual funds to profit from pricing inefficiencies, harming long-term investors.
Legal Issue: Violations of the Investment Advisers Act and mutual fund rules against market timing.
Prosecution: SEC investigated trading patterns, revealing repeated short-term trades timed to exploit NAV fluctuations.
Outcome: Winton agreed to pay over $1.2 million in disgorgement and penalties, and was barred from serving as an investment adviser.
2. SEC v. AIM Advisors, LLC and Principals (2004, California)
Facts: AIM Advisors facilitated market timing for hedge fund clients in mutual funds without disclosing these practices to fund investors.
Legal Issue: Breach of fiduciary duty, fraud, and violation of SEC market timing rules.
Prosecution: SEC used trade records, email correspondence, and mutual fund statements to prove undisclosed rapid trading.
Outcome: SEC imposed $5.5 million in fines and disgorgement and barred the principals from the investment advisory business.
3. SEC v. Putnam Mutual Funds (2004, Massachusetts)
Facts: Putnam Mutual Funds allowed certain hedge fund clients to engage in market timing despite policies prohibiting short-term trading.
Legal Issue: Failure to enforce anti-market timing policies, breach of fiduciary duty, and aiding fraud.
Prosecution: SEC uncovered internal memos and emails showing awareness and approval of rapid trades for select clients.
Outcome: Putnam paid $110 million in settlements, including disgorgement and investor restitution. Several executives were fined and barred from the industry.
4. SEC v. Janus Capital Group (2003, Colorado)
Facts: Janus permitted certain hedge funds to engage in rapid mutual fund trading, providing them unfair advantages over regular investors.
Legal Issue: Market timing violations, breach of fiduciary duty, and disclosure failures.
Prosecution: SEC examined trading logs and client communications demonstrating preferential treatment.
Outcome: Janus paid $400 million in penalties and restitution, marking one of the largest market timing settlements in U.S. history.
5. SEC v. Scudder Investments (2003, New York)
Facts: Scudder Investments allowed some hedge fund clients to engage in market timing in equity mutual funds, circumventing internal rules.
Legal Issue: Market timing fraud, breach of fiduciary duty, and aiding investor exploitation.
Prosecution: SEC relied on trade data, emails, and mutual fund NAVs to show the impact on ordinary shareholders.
Outcome: Scudder paid $35 million in penalties and restitution, and executives faced temporary industry bars.
6. SEC v. Alliance Capital Management (2004, New York)
Facts: Alliance Capital permitted hedge funds to engage in frequent trading of mutual funds, violating stated policies against market timing.
Legal Issue: Breach of fiduciary duty and market timing violations.
Prosecution: SEC reviewed trading patterns and internal communications demonstrating knowledge and approval of rapid trades.
Outcome: Alliance Capital paid $150 million in restitution and penalties, including disgorgement to harmed mutual fund investors.
7. SEC v. Dreyfus Corporation (2004, New York)
Facts: Dreyfus allowed preferential market timing for certain clients in mutual funds, despite public restrictions.
Legal Issue: Market timing fraud, breach of fiduciary duty, and misleading disclosure practices.
Prosecution: SEC analyzed trading logs and emails showing internal awareness of the practice.
Outcome: Dreyfus paid $150 million in settlements, including restitution and penalties.
Key Takeaways from Market Timing Fraud Prosecutions
Legal Basis: Violations include Investment Advisers Act, Securities Exchange Act, and mutual fund anti-market timing rules.
Typical Victims: Ordinary mutual fund investors suffer because rapid trades dilute returns and harm fund NAV.
Evidence Used: SEC relies on trade logs, NAV data, emails, internal memos, and client communications.
Consequences: Penalties range from tens to hundreds of millions in restitution, plus executive bars and disgorgement.
Disclosure Failures Are Key: Most cases hinge on undisclosed market timing, preferential treatment, or violations of stated fund policies.
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